Companies from emerging markets like China are now in the big league, and global investors want to play

Since China joined the World Trade Organisation in 2001, there has been a significant shift in the contribution of gross domestic product from developed markets to emerging markets. In nominal US dollar terms, emerging markets’ share of GDP has risen to 45 per cent from 20 per cent, or, expressed in purchasing power parity terms, from 45 per cent to 60 per cent. Changes in global trade patterns reflect this shift in activity. Whereas two decades ago, the bulk of international trade took place among developed markets, today it is predominantly between developed and emerging economies, with China, India and East Asia accounting for much of this shift. Emerging markets are no longer a peripheral player in global trade, but an engine of economic activity. Investors have increasingly sought to access the emerging market growth story through both debt and equity investments. Emerging bond markets have deepened considerably to constitute 25 per cent of global bonds outstanding, from 2 per cent in 2000. The growing economic clout of emerging markets and their growing bond issuances have yet to be fully reflected in global investors’ fixed-income allocations. This is a function of both access difficulties as well as their underrepresentation in global bond indices. For example, emerging-market debt comprises just 7 per cent of the Bloomberg Barclays Global Aggregate Bond Index. However, this is in the process of changing. The biggest issuer of emerging-market bonds is China, whose US$13 trillion of local debt outstanding is second in size globally only to that of the United States. China’s bond market has historically been inaccessible to global investors and absent from key global bond benchmarks. Inclusion of China’s bonds in global index is a game-changing shift But, since April, yuan-denominated Chinese bonds have been included in the Bloomberg Barclays Global Aggregate Bond Index, which is tracked by more than US$2 trillion of assets under management. China’s bond markets, like those of emerging markets more broadly, have become too big for global investors to ignore, and are finally starting to transition into the global fixed-income mainstream. However, it is not just a sovereign bond story; emerging-market corporate debt is increasingly entering the global credit mainstream. Bank lending continues to dominate the debt landscape in emerging markets, but this is changing as their capital markets mature and become more like those of developed markets. Since 2009, the total emerging-market corporate hard-currency bond stock has more than quadrupled to reach US$2.3 trillion, twice the size of the US high-yield market. This growth reflects not only the increasing importance of emerging markets as an economic bloc but also the increasing stature of emerging-market companies on the global stage. McKinsey estimates that about half of the Fortune Global 500 companies will be based in emerging-market cities by 2025, from just 24 in 2020. Today, there are many examples of companies in emerging markets that are among the largest global players in their sectors, such as Brazil’s meat processor JBS, United Arab Emirates’ port operator DP World, and Mexico’s bakery product manufacturer Grupo Bimbo. Many of these companies also derive significant portions of their revenue from developed markets, further blurring the distinction between emerging and developed markets. JBS earns some 46 per cent of its revenues in North America while for Brazil’s beef producer Marfrig Global Foods, this figure is 65 per cent. Teva, the Israeli pharmaceutical company, derives two-thirds of its revenue from Europe and North America. How China can save the WTO, and itself Of course this goes both ways, and many companies that started in developed markets are now entrenched in emerging markets. The Norwegian telecoms company Telenor generates some two-thirds of its revenue from emerging markets and many Spanish companies such as Telefonica, Banco Santander and BBVA have a significant presence across Latin America, owing to Spain’s historical and cultural ties in the region. A further sign of the increased maturity of emerging-market companies and the blurring distinction between them and developed-market companies can be seen through their acquisition activity. Emerging-market companies have increasingly been acquiring developed-market companies in order to access new markets, much as developed-market companies have done historically. Very often, these are acquisitions of premium brands – think India’s Tata Motors’ acquisition of Jaguar, or Chinese car firm Geely’s acquisition of Volvo – brands that have a long association with developed markets. Clearly emerging markets have become far too important for investors to ignore. A prolonged period of higher growth rates has naturally narrowed the economic gap between emerging and developed markets, while many emerging-market companies have become major players on the world stage, as well as peers and challengers to the historical developed-market leaders. Meanwhile, the ongoing development and liberalisation of capital markets in emerging economies, and the trend toward bank disintermediation, have opened up vast swathes of emerging-market bond markets to global investors. These investors are seeking to latch onto the emerging-market growth story, but are also becoming more comfortable thanks to the blurring distinction between emerging and developed markets. Rodica Glavan is co-lead manager of the BNY Mellon Emerging Markets Corporate Debt Fund

Companies from emerging markets like China are now in the big league, and global investors want to play

.css-1mniedq{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;} The line between emerging and developed markets is blurring. Markets like China and India are becoming simply too big for global investors to ignore

The line between emerging and developed markets is blurring. Markets like China and India are becoming simply too big for global investors to ignore