Emerging markets are playing an increasingly prominent role in areas linked to sustainable investing, according to recent market commentary.
In a recent market commentary, Andrew Ness – portfolio manager at Templeton Emerging Markets Investment Trust, highlighted the growing importance of emerging market companies within semiconductor supply chains, electric vehicle battery production and renewable energy technologies, arguing that the asset class has evolved significantly over the past decade.
According to Ness, many investors continue to associate emerging markets with commodities, currency volatility and political disruption. However, he said the composition of the market has shifted, with innovation, technology and domestic consumption becoming increasingly important drivers of growth.
“The most overlooked story in emerging markets investing is the rise of innovation as a structural driver,” Ness said.
He noted that Asia now accounts for more than half of global patent grants and pointed to companies including Taiwan Semiconductor Manufacturing Company (TSMC), Samsung and SK Hynix as key participants in technologies linked to artificial intelligence, cloud computing and advanced electronics.
Ness also highlighted the role emerging markets are playing in the energy transition.
China and South Korea are among the world’s largest producers of electric vehicle batteries, while Chinese manufacturer BYD has continued to expand internationally, particularly in Europe.
“The electric vehicle and clean energy sectors show a similar pattern,” Ness said. “China and Korea lead the world in EV battery production.”
The commentary also identified financial inclusion as an important area of development within emerging economies. Ness pointed to India’s biometric identification system, which he said covers approximately 95% of the population and has helped facilitate access to banking services, digital payments and investment platforms.
He argued that developments such as these have broadened the sources of corporate profitability across emerging markets.
“This transition matters because it broadens the base of EM earnings beyond commodities,” Ness said. “Profitability is now driven by domestic consumption and world-class global businesses.”
The commentary additionally highlighted the role of renewable energy supply chains in emerging economies. Ness said companies across China are helping support global decarbonisation efforts through the production of technologies and components used throughout the clean energy sector.
Alongside these structural themes, he pointed to valuation data that he believes remains supportive for emerging markets. According to Ness, emerging market equities continue to trade at a significant discount to developed markets, while earnings growth expectations remain comparatively strong.
He also noted that global investors’ allocations to emerging markets have fallen over the past 15 years. The commentary states that allocations have declined from approximately 13.5% of equity exposure to around 5% today.
Ness argued that many global portfolios provide exposure to large emerging market companies but may offer less access to businesses benefiting from trends such as digitalisation, renewable energy adoption and growing consumer demand across developing economies.
Looking ahead, he said the combination of earnings growth, valuations, stable currency conditions and improving capital flows could support the asset class.
“The question for investors is whether they recognise how different today’s EM looks from the version shaped by the past decade,” Ness said. “Growth drivers are broader. Earnings are supported by the rise of domestic consumption and industries with global relevance.”
Main image: sustainable, ESG, guillaume-de-germain-6Xw9wMJyHus-unsplash
