The next market star may be in emerging markets
Here are some of the most promising—and underappreciated—growth stories, in robotics, biologics, fintech and more.
It’s a core tenet of our investing approach: Two themes — seeking long term sustainable trends and owning shares in companies whose technologies will disrupt the global economy —may lead to significant investment rewards over time. As we have discussed three megatrends — digital transformation, healthcare innovation and sustainability —are already transforming economies and societies around the world.
Where might you find the next big beneficiaries of these trends? There’s great potential, much of it underappreciated, in emerging markets (EM), which contribute over half of the world’s GDP growth and encompass over 85% of the world’s population.1 It’s also the home of a burgeoning middle class which is increasingly adopting the three megatrends. And yet while analysts forecast emerging market corporate earnings should grow 30% in 2021, EM equities are trading at a 26% discount vs developed markets, cheaper than 20% long-term average discount.2 In other words, you can find opportunities to capitalize on the three powerful megatrends and still pay a reasonable price.
Here are five of the most promising megatrend growth stories, all of them good hunting grounds for tomorrow’s market stars:
- China is the largest robotics market in the world, and demand for robots in India could be immense.
- China’s biologics outsourcing market is set to grow at the fastest rate of any comparable market globally.
- E-commerce is undergoing spectacular growth in Latin America, and from a low base.
- Latin America boasts many of the world’s fastest growing fintech companies
- Russia’s digitization of consumption is giving rise to online grocery and “super-apps”.
China is the largest robotics market in the world, and demand for robots in India could be immense
By any measure, the growth rate is sizzling: Worldwide the number of industrial robots is expected to grow to 20 million by 2030, up from 2 million today.3 Driving much of that increase is China, where growth in the demand for robotics increased three times faster than in the developed world between 2012 and 2019.
We expect demand for industrial robots in China to grow 20% a year through 2025. Fueling that growth:
- Industrial automation levels below developed market manufacturing powerhouses. The intensity of robot usage in Chinese manufacturing is half that in Japan and Germany.
- Continued adoption of new technologies that further boost manufacturing efficiency via the use of sensors to collect and analyze digital data
- New sources of demand, such as manufacturing factories for electric vehicles and new technologies. We expect China to lead the drive to de-carbonization over the next decade.
Beyond China, demand for industrial robots in India could be immense, especially as the Indian government is providing tax incentives for building new factories. The current level of robotics usage in Indian manufacturing remains extremely low compared with other countries.
The market for industrial robots in India is expected to catch up to global trends
Source: International Federation of Robotics; data as of October 27, 2020.
China’s biologics outsourcing market is set to grow at the fastest rate of any comparable market globally
Oncology revenue worldwide will likely increase to USD 263 billion by 2024, growing at a 12% rate annually.4 But in China, where drug consumption ranks second globally among nations, the biologic drug development market is set to grow much faster. China’s biotech revenues are expected to see high-speed growth of 19% a year, to USD 96 billion by 2023, and annual pharmaceutical and biopharmaceutical R&D spending growth at an average annual rate of 23%, according to a forecast by consulting firm Frost & Sullivan.
That forecast reflects a national focus on innovation and an expanding talent pool, a rising number of biologic molecules entering the R&D pipeline, and a shift in reimbursement spending to novel therapies with proven efficacy. We see areas of biotech opportunity in novel immune-oncology targets and advanced monoclonal antibodies (mAb). In addition, China’s biologics outsourcing market should grow at an annual pace of over 40% from 2018–23, the fastest rate globally, as the increasing complexity in drug R&D raises the demand for contract research organization services.
China's biologics outsourcing services market is projected to grow at a rapid pace
E-commerce is undergoing spectacular growth in Latin America, and from a low base
Online shopping escalated almost everywhere amid the coronavirus pandemic, but nowhere more than in Latin America, the world’s fastest growing e-commerce region in 2020. E-commerce revenues surged 37% from 2019, compared with global growth of 28% during the same period. Analysts project the value of online purchases in Latin America will increase 16% this year and a further 11% in 2022.5
E-commerce sales growth in Latin America is outpacing other regions
Apart from the pandemic, other longer-term drivers of the e-commerce surge in Latin America include:
- Increased internet penetration: In 2000, only 3% of Latin Americans had internet access. Today that share is up to 74%, vs. a global average of 59%.6
- An expanding middle class: The middle class has grown around 50% over the past decade and currently represents about one-third of Latin America’s population, some 200 million people.7
- Growth in nonbank financial institutions: As more and more nonbank institutions provide financial services, even “unbanked” consumers can now make online purchases.
- Ample room to expand: E-commerce accounts for only 4% of total retail sales in Latin America, likely leaving plenty of room for future growth.8
Latin America boasts many of the world’s fastest growing fintech companies
Forecasters expect revenues for “neobanks” (digital banks with no physical branches) to grow from USD 20 billion in 2018 to USD 400 billion by 2026.9 The U.S. and Europe will drive much of that growth, but the pace of fintech adoption in Latin America is rising at a faster clip. Indeed, many of the world’s fastest growing fintech companies — in payment services, alternative financial services, and personal enterprise and asset management services — are now headquartered in the region. They arrived via venture capital backing: fintech investment in the region has increased by more than 10 times since 2016.
Annual Latin American Fintech Financing, $ million
The surge reflects:
- Increased mobile phone access (68% of the population in 2019 vs. less than 10% in 2000)10
- Digital infrastructure development, enabling electronic payments, online lending and other services to people and small businesses
- E-commerce adoption
- Low banking penetration (only about half of the population has a bank account and many who do are dissatisfied)11
Russia’s digitization of consumption is giving rise to online grocery delivery and “super-apps”
As consumers in Russia increasingly switch to cashless payments and online banking, a “digitization of consumption” is well underway. Cashless payments now account for more than 50% of spending in Russia, up from 36% in 201716
Still, these are early days. The e-commerce penetration rate in Russia is just around 10%,12 far below, for example, the UK, where it’s closer to 30-35%.13 But as Russian companies invest heavily in e-commerce logistics infrastructure and attract more consumers, the e-commerce penetration rate is likely to nearly double by 2024, making Russia’s e-commerce market one of the fastest growing in the world.
The food delivery market opportunity looks particularly attractive. Russia was the 8th largest food retail market in 2020, its market size is USD 227bn, yet the online grocery shopping penetration rate is less than 1%.14 Analysts expect that rate to reach 11% by 2030.15 To support this growth, many companies are starting to operate warehouses and distribution centers that serve only online orders.
Finally, the rise of the so-called “super-apps” is boosting online penetration as these platforms allow consumers to integrate different services in one app. For example, customers can use food, parcels delivery services as well taxi and car rentals in one app.