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Emerging markets and the growth drivers of the future

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To see how emerging markets will recover and grow from the pandemic, it is essential to understand the new growth drivers – digital technology, trade, sustainability, and wealth.

The global pandemic has created a health crisis that many emerging markets are still grappling with. This has been followed by an economic crisis as factors like access to vaccines and continued restrictions on movement limit economic activity. The route to recovery will be uneven and differ from country to country. But despite these headwinds, emerging markets can’t be written-off.

“Over the last 20 years, emerging markets have contributed almost two thirds of the world’s GDP growth. To my mind, they are and will remain, a powerhouse within the global economy,” said Mark Tucker, Group Chairman, HSBC, who was speaking at the opening session of HSBC’s flagship Global Emerging Markets Forum, where he discussed emerging market trends.

 trade, sustainability, digital, wealth infographic

China leading the recovery

The recovery is already underway and China will be a key part of the revival. When the world’s second largest economy rebounds strongly, it not only lifts other emerging markets, it also makes a sizeable contribution to the global economy.

Mr. Tucker highlighted some of the opportunities that China currently presents to international businesses and investors. These include its rapidly growing middle class, as well as the development of the Greater Bay Area supported by reforms to further improve connectivity between the different areas that make up the conurbation.

Rethinking trade

While it is clear that emerging markets will continue to play a key role in the global economy, growth models will advance to reflect trends that we are seeing play out.

One of the biggest drivers of global trade has been globalisation. Over the last few decades, increased connectivity between economies has opened up new opportunities for emerging markets to trade with new partners all over the world. But in recent years, the process of globalisation has frayed around the edges as some parts of the world have developed more protectionist tendencies. However, in others including across many emerging markets, trade liberalisation initiatives have continued apace and are supporting growing international commerce.

“The concept of globalised production has actually proved remarkably robust,” said Mr. Tucker. “We have not seen a big permanent shift in production capacity. The geographic distribution of investment is sharper, and a focus on supply chain resilience is really encouraging diversification.”

Sustainability, digitalisation and wealth

Another factor that will shape the future of the global economy is the renewed importance of sustainability, and especially the urgency of tackling climate change. The environmental challenges facing emerging markets are significant – not only are many developing economies highly dependent on fossil fuels, they are also among the most vulnerable to climate risks.

There are also genuine opportunities said Mr. Tucker, as investors are looking for green investments that generate yield.

Many countries have pledged to become net zero carbon emitters by 2050. These targets need to be translated into action, he said, with the upcoming UN Climate Change Conference (COP26) a potential turning point, “We need to see real momentum and a new realism, with emerging markets at the table.”

Technology is another area of real opportunity for emerging markets. The pandemic led to a rapid increase in the adoption of digital products, with McKinsey & Company estimating the process of digitisation has accelerated by as much as seven years1.

From an emerging markets perspective, technological advancements are a game changer, said Mr. Tucker. “They connect producers to new customers, they create and expand markets for online services, they increase financial inclusion, and make it possible to participate in the knowledge economy at minimal cost.”

The digital revolution will also play an important role in the delivery of financial services. He said that the rise of the middle class is one of the most attractive trends for banks going forward, boosting demand for wealth management, insurance and asset management services.

But beyond this, there is another layer of individuals who would benefit greatly from being brought into the financial system. In 2017, 31% of the world’s adult population did not have a bank account2. “For banks, these are the potential customers whose savings and consumption can drive the next wave of growth.”

A strategy for emerging markets success

Technology, sustainability, trade and wealth – all of these trends will be integral to the development of emerging markets. Businesses and investors operating in these dynamic economies will be more likely to succeed by recognising the opportunities presented by these new growth drivers.

To find out more, speak to your HSBC Relationship Manager.

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