Credit risk in today’s fixed income environment
January 9, 2019
American Funds video transcript: “Shifts in emerging markets creating new winners”
Apu Sikri: One characteristic historically defining emerging markets was their faster growth rates. What makes those markets attractive to you today, and conversely, what are some of the risks and drawbacks that you see investing in these markets?
Noriko Chen: I think that the faster growth rates are still there. So, I do believe that emerging markets will still grow above 5% a year. And the IMF still expects emerging markets to go from 50% of the global economy to over 75% of the global economy in the next decade.
But we are seeing a difference in who's making money in these different emerging markets, and I think that's what's really interesting. We're starting to see this inflection point of economies shifting from growth being led by fixed-asset investment to growth being led by the consumer. And there are different companies that are exposed to that. Some are domestic and some are multinational. So, those are the types of discussions that we have on our calls.
Apu Sikri: What changes when growth is led by the consumer? That's typically the hallmark of a developed economy. Does it change how you think about those markets?
Noriko Chen: No, I think it makes us more optimistic about the longer term structure of those markets. So, you're right. It results in less cyclicality, volatility, in both the economy and growth rates, but also in markets as well.
So, we're excited to see this shift happening, particularly in a place like China, and we are looking to see which companies are, again, going to benefit from that shift. I think the companies that had benefited in the past were a lot of the U.S. companies, and again, I think this is one of the reasons why they've been so strong in terms of growth in the past decade. But going forward, we would expect a lot of regional and domestic companies to also benefit from this growth.
Apu Sikri: Do you expect local brands to emerge? You've seen luxury and consumer brands emerging. Do you see that greater competition emerging in the consumer space between the very large multinationals and some of the local companies?
Noriko Chen: Yes, we do. And in fact, we were just talking about that this morning on one of our investment calls. There are now a number of domestic companies in China and in India that are gaining market share at the expense of the multinationals.
In some cases they have very niche products, because they realize — like a Goodrich, in India — that they can't go into the same markets as a P&G or a Unilever. So, they’ve found specific products that they believe Indians need, particularly with the hot temperature, and then they've been able to grow in that particular area. But now they're not just growing in India, but they're also growing in places like Africa and also in Indonesia.
Similarly, in China we have some big domestic companies now. These are very big companies that have very good brands — companies like Moutai, for example —
Apu Sikri: What does Moutai do?
Noriko Chen: Moutai is a rice wine company. And I think what’s happening in China is that the younger generation also likes to buy local. They want to be able to buy local.
Apu Sikri: That’s interesting.
Noriko Chen: So, we're seeing that. But we're also seeing these companies even produce things like shavers and appliances that are starting to gain share from multinationals as well, because they're coming up in terms of product quality. Many of these Chinese companies are also doing external M&A, and they're getting technology from that, and also getting products that are higher priced.
So, we're starting to see this kind of upgrade in some of the domestic products — both through their own efforts and also through M&A — and as a result, I think we'll see a bit more competition for the multinationals.
Apu Sikri: That’s interesting, because I will try and buy in my local town if I can, rather than, you know, through a chain. Is that a similar kind of sentiment among the younger population, just to support local businesses?
Noriko Chen: Yeah, I think it's not that, "Oh, I want to buy a Chinese hairdryer over a Philips hairdryer." I think it's that, "Oh, this Chinese hairdryer is now almost as good as this Philips hairdryer, and it costs a third of the price.”
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