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CIARAN RYAN: Think of emerging markets and we tend to associate them with political turmoil, currency and economic risk. But the investment picture may be changing. Many developing economies are growing faster than their developed-market counterparts, supported by younger populations, rapid urbanisation, expanding middle classes – and rising investments in technology and infrastructure.
At the same time, several developed economies are contending with heavy debt burdens, ageing populations and sluggish growth. So, are investors overlooking a major shift in the global investment landscape?
To discuss this and why emerging markets may deserve a larger place in global portfolios, I’m joined once again by Adriaan Pask, chief investment officer at PSG Wealth.
Hi Adriaan, thanks again for joining us. Let’s start with the broad investment case. Why should investors be paying closer attention to emerging markets now, and what about these political currency and economic risks that I just mentioned? Surely those haven’t gone away?
ADRIAAN PASK: Sure. From our perspective, we look at emerging markets at the moment, and think they are quite a decent opportunity looking forward.
There are quite a few things that factor into that. I think economically we need to remember that emerging markets are expected to generate almost two-thirds of global economic growth over the next five years.
Normally the economies that drive the growth support the businesses that ultimately are beneficiaries of that growth through earnings growth as well.
At the same time, we’re seeing the landscape look a little more compromised in the previously loved areas. A lot has been written about what’s happening in US markets and, looking at debt levels, we know it’s a mature market. Economic growth, if they’re doing well, is slightly above 2% or 3%. It’s not the kind of growth that you see in emerging markets.
China and India alone, for example, contribute almost 44% of global growth at the moment. This is largely backed by a variety of structural drivers that support the long-term emerging market story.
CIARAN RYAN: The emerging market story is more than about just headline GDP growth. What about factors such as younger populations, urbanisation, the rate of infrastructure development, and also the rise of the middle class? How are these trends translating into investment opportunities in the emerging market space?
ADRIAAN PASK: Absolutely – I think that’s such an important component of assessing the true macroeconomic opportunity. It’s not always just about looking at the prevailing GDP numbers or inflation numbers, which is a habit we’ve got into when we evaluate different economies.
You should also look at where the current is flowing, and where things could be going.
So I’ve mentioned the demographics in terms of these younger populations, and they tend to be more productive populations. For example, they tend to spend more money in the economy.
Typically, they are not as heavy a drag on the economy. That sounds now like very poor wording. But the reality is that ageing populations tend to become somewhat of a burden from a fiscal perspective because they aren’t necessarily as productive in the economy, but they still need all the relative support, whereas younger populations tend to make a big difference because they are economically active, et cetera.
Part of that whole journey is also urbanisation. If you look at a country like the US, 80% of the US is completely urbanised.
That’s a big driver of economic growth – whereas, if you look at a country like India, for example, only roughly a third of the country is urbanised, and we can already see what a difference it makes to have more urbanisation coming through, wealth growing, spending growing, corporate profits growing.
The more important thing is that it puts some longevity behind the theme because these are things where we often talk about the ‘cyclical nature of investing’ and things that last maybe for three or four or five years.
This is not a short-term cyclical thing. It’s very much a structural underpinning.
And if you think about things like what happens with that urbanisation, education and technology adoption, infrastructure investing is a really important part because obviously as this urbanisation happens, there needs to be investment into infrastructure to sustain these populations in the new environment.
And if you think back to China, going back 20 years, for example, and how much money the government spent on infrastructure and actually growing the economy and how positive that was for economic growth, those are similar things that need to happen.
Whereas if you look at what’s happening in other developed markets, for example, even though infrastructure needs are there, much of what’s being spent by the government is not really on infrastructure. Government relies on the private sector to build out the economy.
The AI buildout is a very good example. Most of the infrastructure spending is happening through the private sector, and the government spends very, very little on these infrastructure investments in the context of their budgets. Typically, funding goes to big debt burdens, it goes to social welfare, and it goes to defence spending.
Those are typically the focus areas where the nature of spending in emerging markets is a lot more focused on the infrastructure side, which I think helps things along quite a bit.
CIARAN RYAN: Investors might be concerned, when they look at emerging markets, about the lack of fiscal discipline. You’ve touched on that and where the spending is going. There’s also the sovereign risk aspect. Is that a fair assessment, particularly when you look at how developed economies are now facing record debt levels, huge deficits, very slow growth. Also, how does South Africa fit into this?
ADRIAAN PASK: I think that’s a really important point and it leads on quite nicely from the comments around having money available for investing in things like infrastructure and other things.
At the moment, if you look at the US case, it makes for a good example because it’s the biggest developed market, of course. But if you look at what’s happening, the US has essentially been in a budget deficit for 20 years.
They just continue to overspend, which means that every year that they are overspending they incur more debt at the same time you’ve got a global financial crisis or a Covid crisis, and every time they need more money.
Eventually that debt gets out of control, and that’s where things are now – that debt has really ballooned. What makes it worse is that you are heading into an environment with high interest rates, which means the funding cost of that debt is incredibly high, and it eats into all your tax income. You use quite a bit of that just to pay off the interest on your debt.
In the US, for example, debt-servicing costs for the government are well over $1 trillion a year. That’s money that could have gone into the economy, into infrastructure and into development, et cetera.
If we contrast that against what we see in emerging markets, I think there’s also escalation in debt, but not nearly to the same levels we see in some of these developed markets.
Typically, emerging markets now have less debt than OECD [Organisation for Economic Co-operation and Development] countries on average, which says quite a lot.
I think what’s happened after the previous crises that emerging markets have gone through over the last, call it 30 to 40 years, is they’ve learned how to be more disciplined around fiscal spending.
So, if you go back into the 1990s, when quite a few emerging markets ran into fiscal problems and debt problems and currency problems, I think the reforms that they’ve had since then have really enabled them to be a lot more controlled around how they grow their debt, et cetera.
So the situation looks a whole lot better for us.
CIARAN RYAN: Right. Emerging market assets are traditionally trading at quite a discount to developed markets, although that will vary quite considerably from one country to another.
I guess the question arising from that is whether these emerging market equities, bonds and currencies are still attractive.
And how should investors distinguish genuine opportunities from markets that are cheap for a very good reason?
ADRIAAN PASK: I think that’s a really good question. If we look at emerging markets and we sort of look at the last 15 years relative to some of the other markets around the globe, over the last 15 years, there has only been one show in town, and that has been the US markets.
So emerging markets have lagged, the UK has lagged, Europe has lagged. The US was really the only place for investing for a long time, but that has really translated into valuations that look quite attractive.
What we saw, if you cast your mind back to 2025, was that it seemed like the market said, no, we anticipate earnings are going to come to emerging markets – and emerging markets started to rally.
Emerging markets were up, depending on which country you looked at, on average between 40% and 50% last year. They had a fantastic year.
What’s happened this year, however, is we did see the earnings come through.
So earnings growth in emerging markets is looking very good, but because of all the geopolitical tension we’ve actually seen the stocks become cheaper.
It’s quite ironic that the forecast that was made by investors last year – in terms of ‘these companies are going to do well, it’s a good time to invest’ – did materialise, but it seems the risk appetites have gone down and now they’ve made them even cheaper than they were going into 2025.
So we think the timing is pretty fortunate, and we think the acceleration in earnings growth is going to continue.
But I think that point that you made – that there are big differences between countries – is so important in the emerging market space. We do see inflows into ETFs [exchange-traded funds] for emerging markets, for example.
I don’t think that’s the right way that you would want to take advantage of the opportunity. If you think back to Russia, for example, when they went through tensions between Russia, Ukraine and the US getting involved in sanctions and all of that, Russia used to be 4% of the EM [emerging markets] index, and it essentially vanished overnight. It became uninvestable.
That’s a loss that you face if you don’t have a manager looking at actively allocating between countries. Managing risk in this environment is super important – and you can’t follow a passive approach in this environment.
CIARAN RYAN: All right. So, you are obviously advocating for an active rather than a passive management approach to emerging markets.
Just explain why that is, and then what risks index-tracking investors can be exposed to. You mentioned Russia as being uninvestable for a period of time. How do you manage all of that?
ADRIAAN PASK: I think it’s just about making sure. What we’ve done, we’ve now launched a new portfolio in our Wealth business for emerging markets, and we outsource the capital to management companies all over the globe that are experts in this field.
I think what’s really important is to utilise managers that are very, very close to developments in this space, and who understand the environment really well.
Some of the classic examples of risk are where you need to think about how you manage that in a portfolio.
I’ve mentioned Russia, but more recently, I don’t know [about] the guys that follow Asian markets quite closely – in South Korea, for example, two of the biggest stocks in South Korea, Samsung and SK Hynix, fantastic businesses, have been doing extremely well from a profit perspective, and the share prices have followed.
But the nuance that you must also recognise is that in the South Korean market we’ve seen a lot of leverage enter into the system, and we see how that leverage tends to unwind very rapidly when stock prices are under pressure.
So you have to think carefully about how much you allocate to that environment. How do you think about the risk of leverage into those stocks while you can still harvest some profit growth and share price growth out of that same environment?
You can hear that it’s not something that you just invest passively into and wait for things to hopefully work out. You need to think quite thoroughly about those things.
India has been another example. A fantastic investment opportunity.
When China went through its own issues, I think investors sort of defaulted into India, thinking that’s a good substitute, with a lot more stability and clarity around what the outcomes could be. But then the Indian markets went up so much that they became expensive.
Then you need someone there who can take some profits and allocate those into some of the unloved areas.
I think you typically get far better results from what we could see; the active managers we could find to manage money for us in the emerging market space do a whole lot better than some of these passive solutions in the area.
CIARAN RYAN: All right. Adriaan Pask, we’re going to leave it there. Thanks very much for your time, Adriaan.
ADRIAAN PASK: Thank you very much, Ciaran. It’s been good to be on the podcast.
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