Emerging Markets: The World's Innovation Lab

In the late twentieth century the emerging economies operated much as they had in the early twentieth century. The largest sector in the MSCI Emerging Markets Index, after financials, was materials. Put another way, the companies that extracted the emerging markets’ mineral wealth for export to the developed markets accounted for about a fifth of the emerging markets’ publicly traded and tracked economic activity.

That was in 1995, seven years after the inception of the emerging markets index. Since then, the market value of the index has grown to $5.3 trillion and materials' share of it has shrunk by almost two-thirds, eclipsed by the sectors most commonly associated with the advanced economies. Information technology, which amounted to all of 2.3% of the index’s total capitalization weight in 1995, represented nearly 30% of the index at its recent peak (see chart). The total, which counts in the communication services sector that MSCI spun out to accommodate the explosive growth of the internet, surpassed financials as the index's biggest constituent.

Mapping the EM Journey from Shovels to Computer Chips

The emerging markets have leapfrogged past the developed markets on the internet and technology is transforming daily life in the emerging markets in four vital aspects: shopping, banking, education, and recreation. This technology revolution has had its greatest impact to date in China, but it is proceeding at varying speeds throughout the emerging world.

In one critical respect the emerging markets have forged ahead of their more mature counterparts. Lacking a built infrastructure at the outset of the data revolution, they seized the lead in building out a technological infrastructure. Developed markets consumers, who traditionally benefited solely from emerging markets raw material inputs, can now increasingly benefit from emerging markets innovation and services. And global investors, who once viewed the emerging markets as a "natural resources play,” could do well to look to them as a growth asset.

The preceding is an excerpt from Emerging Markets: The World’s Innovation Lab. Read the full paper.

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The MSCI Emerging Markets Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The MSCI Emerging Markets Index consists of 24 emerging markets country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates. The index is unmanaged and has no fees. One cannot invest directly in an index.

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