TERRENCE GRAY believes there are growth opportunities investing in often overlooked companies that will help to transform the lives of people by lifting this bottom billion out of poverty.
When I began investing in emerging markets we were often described as treasure hunters, seeking growth in untapped frontiers. That was around 28 years ago, but my approach today is still very much tapping into the forgotten discovery trails to uncover the opportunities that are overlooked by many investors.
This means there are investment prospects in emerging markets beyond just the big names such as Alibaba or Meituan.
Over the past few years there has been such a narrow focus on these big-name stocks. While the merits of these companies are undisputable, they represent a more mature outlook. However increasingly, there are other companies offering compelling opportunities that are being overlooked or under-invested in.
There are real opportunities in under-saturated parts of the market, like the retail market in India where established retailers represent only ten per cent of the market. In Africa, there are prospects emerging in ecommerce while in Bangladesh there is real scope for banking to grow with only 15 million bank accounts established in a population of 163 million.
Importantly, these companies are providing easier access to products and services that are making a real impact by improving the lives of the bottom-billion of people in the region. This pre-emerging middle class of four billion people are set to join the ranks of the middle class over the next ten years, representing $5 trillion in GDP.
There are huge growth opportunities to invest in companies that will ultimately help transform the lives of people by lifting this bottom billion out of poverty.
But to really make this positive impact, companies need to offer affordable products and services to a large market population. There is a myriad of opportunities, from the nutritional benefits of pasteurised milk to micro loans and insurance.
To ensure that these companies are leveraged to the growing opportunity, it is necessary to find the knee of the S curve – which means looking at what level of income is needed for the product demand to really take off.
In a population with $1,000 of GDP per capita, people start spending on oral care products and food and drink. As this income per capita increases, there is spending on more sophisticated products such as insurance, bank products and home appliances. And household spending is key; in many bottom-billion economies, a typical household of four to six people can pull together their income to make purchases, which really drives their ability to be able to afford these products.
It is not about making random investments. Rather it’s about choosing companies with products that are both affordable and durable. Culture is a key competitive advantage – you cannot just roll out a Western product to the emerging market consumer. The product must meet the community’s needs and desires. For example, in India many older people use charcoal to clean their teeth and so Colgate India now offers charcoal flavoured toothpaste.
There are ample opportunities driven by technology. The companies in our portfolio derive around 70 per cent to 80 per cent of their revenue from providing technologies such as automation, artificial intelligence and cloud technology to the bottom billion. Software-as-a-service provider, Glodon, helps improve the safety of construction sites in China. It also helps improve the productivity of workers and has raised the income levels of blue-collar workers in the country over the last several years.
It seems that an essential item for the bottom-billion are mobile phones as there are 5.2 billion mobile phones around the world, yet only 4.2 billion toothbrushes. It would appear that people are willing to suffer tooth aches, but they will not sacrifice the ability to have a mobile phone. Importantly this has given them access to basic financial services including mobile money, micro loans and even telehealth. Many of these opportunities were not available ten years ago, and some of them weren’t even available two years ago. Telemedicine is also another huge opportunity with technology now allowing remote rural areas to have access to doctors.
The approach behind impact investing does not come at a cost to returns. Investors can still make a positive social impact while achieving positive returns.
If anything, the global health pandemic has elevated the importance of protecting the most vulnerable. Many of the programs that were rolled out during COVID focused on supporting incomes through loan guarantees which showed that supporting incomes and peoples’ livelihoods can underpin growth. This is only going to embolden countries and companies to start thinking about how they can make a positive impact by creating jobs and improving the incomes of the bottom billion, so many communities have the opportunity for a more enriched life.