Invest in economic transition and growth?

Emerging markets: One concept, many opportunities

* Source: www.bertelsmann-stiftung.de Note: There is no uniform definition for this classification
** These are: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, South Korea, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, United Arab Emirates. Source: www.msci.com
*** As components of the MSCI Emerging Markets Asia: China, India, Indonesia, Malaysia, Pakistan, Philippines, South Korea, Taiwan, Thailand Source: www.imf.org

Did you know that ...

... more people

live in China (1.4 billion) and in India (1.3 billion)^[1]

than in all of the industrialised nations combined (1.2 billion)?

... the emerging markets contribute to about

about 60 percent ^[2]

of global economic output after adjusting for purchasing power?

... China has had the world’s

largest economy^[3]

after adjusting for purchasing power, since 2017 and is even ahead of the United States?

... gross domestic product per capita, after adjusting for purchasing power, is higher in both

Hong Kong and Taiwan^[4]

than it is in Germany?

... economic growth rates in Asian emerging markets are typically

three times higher^[5]

than those for developed markets?

All Xtrackers Emerging Markets ETFs

Invest in emerging markets – investments with potential

Emerging markets are economies that are undergoing a comprehensive transformation process and often enjoy strong economic growth^[6] – hence the name “emerging markets.” Of course, these facts alone don’t amount to positive investment criteria, but many of these emerging markets have performed remarkably well in recent years. Investors who have narrowly associated China or Brazil with commodities or cheap counterfeit products until now should take a closer look. After all, the key reasons for investing in emerging markets have evolved significantly in recent times.

Strong economic growth

Economic growth rates in emerging markets are currently about twice as high as in developed economies^[7]. Consequently, by 2050, today’s emerging markets could make up six of the seven largest economies in the world^[8] – besides the expected leaders China and India, Indonesia may also be among them. The forecast increase in gross domestic product (GDP) per capita is equally impressive. While per capita GDP in the United States and Germany could grow by around 50 percent between now and 2050, a tripling of GDP per capita has been forecasted for India over the same period, for example^[9].

Social potential

The average age of the population in emerging markets is often much lower than in industrialised nations. In India, for example, the average person is under the age of 30^[10], compared with over 45 in Germany^[11]. Therefore, India’s economy has proportionally more workers at its disposal – an important prerequisite for sustained economic growth. At the same time, many emerging markets are rapidly improving their educational outcomes. Among the Top 25 educational institutions worldwide, there are now two Chinese universities – the best German university ranks in 32nd place^[12].

Dynamic markets

Emerging markets are still under-represented in the global benchmark index MSCI All Country World. Their 12 percent^[13] share of the index does not do justice to their roughly 60 percent contribution to world purchasing power-adjusted GDP^[14]. However, the global significance of emerging economies’ capital markets is rising steadily. For example, since 2018, Chinese onshore equities (“A shares” – which had been available almost exclusively to domestic investors until then) have been included in MSCI benchmark indices. Their share was further increased in 2019^[15].

Modern growth models

In past decades, most emerging markets grew primarily due to their strong exports. This may have provided rapid growth, but it also made these countries susceptible to crises. In recent years, this picture has begun to change. In China, for example, the share of exports to GDP fell from 36 percent (2006) to less than 20 percent (2019)^[16]. At the same time, consumer spending has increased significantly^[17]. Many other emerging markets also have more diversified economies today. As such, they have reduced their dependency on the world market and are now less prone to external shocks.

Things to bear in mind when investing in emerging markets

Emerging Market Risks

Exposure to emerging markets generally entails greater risks than exposure to well-developed markets, including potentially significant legal, economic and political risks. The prices of emerging market exchange rates, securities and other assets are often highly volatile. Movements in such prices are influenced by, among other things, interest rates, changing market supply and demand, external market forces (particularly in relation to major trading partners), trade, fiscal, monetary programmes, policies of governments, and international political and economic events and policies.

When investing for the long term, however, some risks can be mitigated, such as possible restrictions on the tradability of securities, or higher volatility during certain market phases.

Politics

Political risks include sudden tax increases, changes in economic policy, or internal conflicts

Corporate governance

Shareholder rights, anti-corruption efforts and transparency are still at a relatively low level

Liquidity

The capital markets of most emerging markets are less developed than their counterparts in industrialised nations

Currencies

Emerging Market (EM) currencies are considered especially prone to volatility and are dependent on U.S. interest rates^[18]

Volatility

Equity and bond markets of emerging economies are generally more volatile

Asia – core region for investors

Emerging markets expand the regional investment universe and enable exposure to countries with strong economic momentum and different currencies. In this context, Asia could be viewed as particularly interesting for an investment region, allowing for a compelling combination of an emerging market investment with future-oriented themes such as sustainability, big data and future mobility.

China – the world’s growth centre

General background

Now the world’s largest economy^[19] China is the second global economic superpower, next to the United States, and could continue its growth path in the years ahead. The focus is on strengthening the domestic market and future-oriented industries, such as technology and digital services. China is now undisputedly the determining factor for macroeconomic development in Asia^[20].

DWS assessment

Private consumption should remain the main driver of growth for the Chinese economy. This is supported by stable exports and a strong industrial sector. Particularly interesting in the long term is China’s shift toward a sustainable oriented economy and its focus on the expansion of renewable energies.

EM_ASIA_CHINA

India – on the path to new strength

General background

India remains an agriculture-based economy, with the agriculture sector being the country’s biggest employer^[21]. However, the Indian economy’s main growth driver is the services sector (such as IT and software services)^[22]. India has a young population and is increasingly integrated into global economic cycles. By 2050, India’s share of global GDP, adjusted for purchasing power, could more than double from 7 percent in 2016^[23].

DWS assessment

The reform program of the current government – for example, in the areas of labour law and corporate governance – has significantly raised the competitiveness of the Indian economy in recent years. In addition, the share of well-educated workers should increase considerably by 2025, unlike in most other countries. On the other hand, the investment rate in India is still too low. However, this gap could be partially filled with the help of foreign direct investments.

EM_ASIA_INDIEN

South Korea – high-tech success

General background

South Korea ranked among the world’s poorest nations until the 1960s, yet since then it has experienced a spectacular economic boom^[24]. It has caught up with developed countries in many respects – such as per capita income^[25]. Technology is a key sector of the economy. South Korea has one of the world’s biggest and most innovative technology sectors^[26].

DWS assessment

Growth prospects remain strong. The path that the country has chosen on the way to a green and digitalised economy should be supported in the long term, whilst hih savings and incomes should help to sustain this trend. The ageing of society remains a challenge. However, the continued increase in the integration of women in the workforce and a raising of the retirement age will counter the contraction of the working population.

EM_ASIA_SUEDKOREA

Xtrackers emerging market Exchange-Traded Funds (ETFs): An overview

Equity ETFs: Focus on the growth region of Asia

Emerging markets are located across the world, but a majority of important emerging markets – and those with very interesting growth potential – are in Asia. These include China, India and South Korea. Consequently, Asia offers investors one of the widest selections of interesting regional and country-specific funds.

Name	TER p.a.	ISIN
China, India, South Korea
Xtrackers FTSE China 50 UCITS ETF 1C	0.60%	LU0292109856
Xtrackers Harvest CSI300 UCITS ETF 1D	0.65%	LU0875160326
Xtrackers Harvest FTSE China A-H 50 UCITS ETF 1D	0.65%	LU1310477036
Xtrackers MSCI China UCITS ETF 1C	0.65%	LU0514695690
Xtrackers MSCI India Swap UCITS ETF 1C	0.75%	LU0514695187
Xtrackers MSCI Korea UCITS ETF 1C	0.65%	LU0292100046
Xtrackers Nifty 50 Swap UCITS ETF 1C	0.85%	LU0292109690
All Emerging Markets Equity ETFs

Fixed income ETFs: Capturing the yield premium of emerging markets

Fixed income investments in emerging markets usually aim for higher yields compared with developed market bonds. Most emerging markets worldwide fulfil this criterion. A global approach is therefore more advisable than a regional focus with fixed income ETFs, unlike with equity ETFs.

Name	TER p.a.	ISIN
Emerging Markets
Xtrackers II Harvest China Government Bond UCITS ETF 1D	0.35%	LU1094612022
Xtrackers II USD Emerging Markets Bond UCITS ETF 1C EUR Hedged Core	0.40%	LU0321462953
Xtrackers II USD Emerging Markets Bond UCITS ETF 2D Core	0.25%	LU0677077884
All Emerging Markets Fixed Income ETFs