Emerging Markets: Investing in an Age of Unusual Change

It is our belief that the world is in a period of extraordinary application and change. Clearly the world is always changing; however, many of the areas of change that we are observing today are of such a profound nature that you would need to look back generations, or even centuries, to find suitable comparisons.

Whether it be change concerning the future role of global currencies in a world of ever-growing debt, huge technological advancements, or the ever-louder calls for governments and countries to hit net-zero carbon-emissions targets as climate-change concerns grow, the impact on the global economy – and individuals – is potentially enormous.

Take the latter example.

The sixth and latest report by the United Nations’ Intergovernmental Panel on Climate Change (IPCC) in August warned that the world would reach 1.5 degrees of warming (the most aggressive target from the 2015 Paris Accord) by 2030 under all scenarios examined. It speculates that it might be possible to contain warming to 1.5 degrees by the end of the century if net-zero targets are hit by 2050. If we are to collectively achieve these targets, it will require an extraordinary level of change in terms or our current type and levels of energy production.

In another recent report, the International Energy Agency (IEA) outlined what it believes would be required to achieve net-neutral carbon emissions by 2050:

• By 2030: Electric vehicles (EVs) would need to account for 60% of global car sales, and all new buildings would need to be zero-carbon-ready.
• By 2040: 50% of existing buildings would need to be retrofitted to zero-carbon-ready levels.
• By 2050: Almost 70% of global electricity generation would need to be solar and wind; oil consumption would need to decline by 75% to 24 million barrels/day (from 90 mb/d in 2020) and unabated coal consumption would need to decline by 98%.
• By 2050: Almost half of the global CO2 emission reductions will come from new technologies that are currently at demonstration or prototype phase, while most CO2 reductions through to 2030 will come from technologies readily available today.

Inevitably, one can pick large holes in any such long-term forecasts. But, whether a climate-change skeptic or not, the reality is that major world governments are committing to net-zero targets, in the 2050-2060 range, and achieving these targets will entail an energy transition likely to be more significant (and disruptive) than the emergence of thermal coal as the dominant form of energy in the 19th century, or of oil and natural gas in the 20th century.

Another area of great change is occurring in the automotive industry. Electric-vehicle (EV) adoption is now starting to happen quickly, with China seeing the fastest growth, and compelling opportunities opening up in Asia, given the scale leadership of Chinese and Korean companies in EV battery production.

The power of exponential gains is immense and difficult for humans to fathom. An analogy is helpful; if you started in 1984 and progressed automobile technology at the same pace as semiconductors (essential components in EV and autonomous vehicle production), you would be driving a car that had over one billion in horsepower and could deliver six million miles per gallon – and you would pay less than US$5,000 for it!

In 1975 Gordon Moore predicted that semiconductor performance would double every two years. This forecast of exponential growth has proven true, earning the moniker ‘Moore's Law’. It is this long-term trend of rapid, exponential improvement in performance, power and price, which has driven the ubiquity of semiconductors that we take for granted today. Moore’s law is continuing; all the hard-fought gains in processing power that we have achieved in our lifetimes, could be doubled again over the next two years, as the chart below shows:

Moore's Law: Transistors per microprocessor

^{Source: Karl Rupp, 40 Years of Microprocessor Trend Data, Our World in Data, 2020.}

Perhaps even more impressive than the realization of Moore’s Law over the last 20 years, is the extraordinary progress in bringing down the cost of gene sequencing. A leading Chinese company in this space now claims to be sequencing genes at US$100 per genome, with a US company not far behind. This compares to a cost of US$100 million in 2001, according to the National Human Genome Research Institute (NIH). At the current cost levels, the mass applications start to boggle the mind, in terms of screening for disease and understanding population genetics.

Cost per Genome (US$)

Both listed and private emerging-market companies are clearly at the heart of driving progress in gene sequencing and semiconductors, as key enablers. It is very likely that emerging-market companies will also be at the forefront of applying these capabilities to game-changing real-life uses for people and industry.

In our article, Investing in an Age of Unusual Change, we try to outline these and other areas of unusual or extraordinary change that are relevant for the investment landscape in emerging markets. Some are interconnected, but we would struggle to conceive all the causations, correlations and implications of each. Instead, we outline some of the more predictable implications of these changes to help emerging-market investors to better understand the challenges, and just as importantly, the opportunities, that lie ahead.