Is there a change of sector leadership underway within emerging markets?
For years, commodities and energy delivered world-beating returns to emerging market investors. Yet in recent years there are signs of a shift, says Todd Henry, equity portfolio specialist at T.Rowe Price.
With the China tailwind no longer as strong as before demand for oil and metals will not be as robust as in the past decade, Henry says. But in China as well as elsewhere, disposable incomes have risen as a result of the fast economic growth these countries experienced in the past decade.
Check out the following two graphics from T.Rowe Price.
The first figure shows that in the ten years to December 2007, just before the global financial crisis erupted, emerging equities returned 300 percent in dollar terms. The two sectors that won the returns race in this period were energy and commodities, with dollar-based returns of around 650 percent. This is not surprising, given the enormous surge in Chinese demand for all manner of commodities, from oil to steel, as it fired up its exporters’ factories and embarked on a frenzy of infrastructure improvements.
The chart shows that consumer discretionary shares (comprising of auto or luxury goods makers) didn’t actually do too badly either, returning more than 300 percent. But they sat 5th in the rankings, beaten also by financials and healthcare in terms of returns. Shares in consumer staples (essential goods) came in sixth.
But take a look at the second chart showing sector returns between January 2008 and June 2012. What a turnaround. Now it is indeed the EM consumer who started to deliver, with consumer staples returning around 70 percent in this period while discretionaries provided returns of around 40 percent.