The landscape has changed just as much outside of the U.S. in the five years since the credit crisis.
Five years from the nadir of the global financial crisis, American commentators have focused their postmortems mostly on what has happened in the United States. While the shifts have been tectonic here, everything from a rethink of housing to unprecedented Federal Reserve intervention, the upheaval in financial markets has been just as significant overseas. In some ways, the remodeling outside of the U.S. has been even more fundamental.
Emerging Markets: Beyond Oil and Ore
What these changes mean for investors is that they may need to redraw their mental maps of overseas markets. Nowhere is this more true than in emerging markets. Many long-held assumptions about emerging markets no longer apply five years after the crisis. For years, many thought of emerging markets as fairly homogenous economies dominated by commodity-oriented sectors such as energy and materials. The precrisis boom in commodity prices and the resulting growth in places like Brazil and Russia likely reinforced this perception.
But overall, emerging markets are now less driven by those two sectors. In October 2008, energy and materials stocks consumed nearly a quarter of the MSCI Emerging Markets Index. Today, that combined weighting is below 20%. The recent bankruptcy of Brazilian Eike Batista's oil company OGX is a symbolic epilogue to the mid-2000s boom.
Instead, less commodity-oriented businesses have become much more prominent in emerging markets. Technology companies have made some of the biggest strides, with Samsung Electronics, Taiwan Semiconductor Manufacturing TSM, and Tencent Holdings now qualifying as three of the five largest companies in the MSCI Emerging Markets Index. Granted, Samsung and Taiwan Semiconductor are mature companies, but Tencent has grown rapidly in the nearly 10 years since it went public and now has a market cap close to $100 billion. Technology's standing in the index is likely to continue growing with Chinese e-commerce company, Alibaba, set to go public in the coming weeks.
These trends are reflected in the index's composition. Technology stocks now account for nearly 15% of the MSCI EM Index, up from 11% in 2008. That weighting isn't that far below the 17.8% that technology occupies in the S&P 500, and it's miles ahead of the 3.2% tech weighting in the MSCI Europe Index. But emerging-markets companies remain scarce in health care. That sector makes up just 1.6% of the index versus 13.0% of the S&P 500.
Branded Companies Thrive on Wealthy Consumers
One common theme across markets has been the increasing prominence of branded consumer-goods companies. Although many people have struggled as their incomes have stagnated or fallen since the crisis, wealthy consumers have been thriving globally. Even as growth has slowed in emerging markets, many consumers there now have the disposable income to spend on branded products, many of which are produced by companies based in developed markets.
Luxury brands have fared best, particularly those from Europe. The shares of upscale spirits companies Pernod Ricard RI and Diageo DEO have doubled during the past five years, thanks largely to their growth in emerging markets. Such stocks now count for a larger share of the major indexes. Consumer discretionary and consumer staples stocks combined now account for a slightly larger 22% share of the MSCI EAFE Index versus less than 19% in 2008.
Even though there are still few global consumer brands emanating from emerging markets, these two sectors have grown even more there. The combined consumer discretionary and staples weighting has increased from 11.5% of the MSCI EM Index in 2008 to 17.0% currently, benefiting from the emerging middle class.