EMEA sectors to broaden by 2020, says Fidelity International

Growth in consumer demand, increased infrastructure spending and improved utilities will fuel the change in market structure.

The Emerging Europe, Middle East and Africa (EMEA) region is dominated by the energy and financial sectors, which together represent more than half (51%) of the market between them. However, the region’s dependence on energy in particular is likely to fall relative to other sectors over the next decade, according to Fidelity International, the UK’s largest mutual fund manager.

Covering more than 58 million square kilometres, combining more than 80 countries running from Russia through to the Middle East and the entire African continent, and home to more 1.5 billion people, the EMEA region is huge and as the burgeoning consumer market expands, the wealth of investment opportunities will only grow.

The MSCI EM EMEA index has a market value of $1.5 trillion. Within this market are a diverse range of companies resulting in broad sector coverage. With 82% of the world’s oil supplies to be found in the region, and a couple of oil companies with significant individual weightings, it is perhaps unsurprising that the energy sector is dominant - representing almost 28% of the market. Indeed, in order to be able to take sensible overweight and underweight positions on some stocks without breaching UK investment fund rules, Fidelity International uses a capped version of the index which limits stock weightings to 5%.

“I expect the sectors to broaden further over the coming years,” comments Nick Price, manager of the Fidelity EMEA fund. “As countries in the region experience surging consumer growth, increased infrastructure spending, improved utilities and improved corporate governance, the structure of the markets will change. I fully expect the energy sector to lose some of its dominance while other sectors increase their market share.”

The EMEA region has seen a sustained period of GDP growth in the last decade that is three-fold that of growth in Western Europe and the US. This growth has produced a burgeoning generation of consumers who are finding new uses for their rising incomes.

“In Russia and the Middle East, the emergence of a middle class is evident in purchasing trends across a range of diverse goods and services, such as financial advice, cars, second homes, tourism, western food and private education.” continues Price. “In sub-Saharan Africa, new consumer patterns such as mobile phone usage, is reflecting the first experience of disposable income – a surplus of earnings over that needed for food and shelter. The latent consumerism across the EMEA region offers attractive long-term fundamentals for businesses in markets that have no established leaders and little competition.”

The region’s economic development has also seen urbanisation at an unprecedented rate. This has placed huge demands on infrastructure and led to an increasing demand for housing, transportation, communications and other services. The new found wealth generated from oil and natural resource revenues is enabling EMEA governments to address vital infrastructure improvements by investing in railways, transportation, pipelines, ports, electricity and water generation. This is vital to sustaining long-term growth through better distribution and transportation networks and boosting productivity.

“Today’s dominant sectors will remain to a certain extent but the emphasis is expected to change.” concludes Price. “I expect Financials to increase their weighting slightly while Energy, Materials and Telecommunication Services will lose share to other sectors making the market even more diversified.”