Urbanization is Changing the Face of Emerging Markets

Urbanization is Changing the Face of Emerging Markets

Throughout history, population shifts from rural to urban areas have driven increased productivity, consumption, and higher standards of living. Population concentrations into centralized urban centers have helped produce an ample work force while allowing for more efficient uses of energy and resources. This concentration also eases the distribution of goods and services among a growing consumer class. The Industrial Revolution in Europe and the U.S. in the mid-eighteenth century would have been impossible without such migration.

Today, the massive move of agricultural and mining workers from the countryside to rapidly growing cities is similarly transforming the economies of many of the world’s emerging markets (EM). Younger, fast-growing populations are leaving agricultural areas and moving to expanding cities in search of better-paying jobs and a higher standard of living. The following are just some of the transformations we expect to see in EM in the next 20 to 30 years.

The Move to Cities Will Have a Dramatic Impact on EM

Most of the economic growth due to urbanization expected over the next 20 to 30 years will come from emerging markets.

An estimated 5.2 billion people, more than half the world’s population, will be living in urban centers in emerging markets by mid-century.1

Increased urbanization and per capita economic growth have historically moved in tandem. According to McKinsey Global Institute research, EM cities and megacities (those with populations of 10 million or more) should account for approximately 60 percent of global gross domestic product (GDP) growth over the next decade; and that figure is accelerating.2

India and China Are the Major Drivers of Urbanization

 Each month, India adds about 1.1 million people of working age.

Each month, India adds about 1.1 million people of working age (15-64, as defined by the Organization for Economic Co-operation and Development [OECD]). China, despite an aging population, will add more than 100 million workers over the next 15 years.3

 China, despite an aging population, will add more than 100 million workers over the next 15 years.

All told, half of urban growth over the next decade will come from Asia; China and India alone will account for about one third of that growth.

 Urbanization and GDP Growth Have Traditionally Moved in Sync

 

Urban consumers are expected to be the leading component of global consumption growth for the next decade and more, adding about USD $20 trillion per annum to global goods spending.2

What Are the Implications for the Markets?

Infrastructure

The infrastructure spending required to create and expand cities and megacities will account for some of the most dramatic effects on specific areas of the markets.

Consumption

We expect emerging consumers to drive higher demand for virtually all types and levels of goods and services, from necessities to luxury items.

Quality of Life

The desire for a higher standard of living will also drive expansion in select portions of the markets, including healthcare, education and leisure travel.

Understand the Potential

Investment Professionals: Download our newest Market Spotlight for more insight on how substantial urbanization may impact EM economies and provide growth opportunities (login required).

1 United Nations World Urbanisation Prospects, 2014. Data from 12/31/1950 to 12/31/2014, with estimates to 2050. More developed regions comprise Europe, North America, Australia, New Zealand, and Japan. Less developed regions comprise Africa, Asia (ex-Japan), Latin America, the Caribbean, and Oceania ex-Australia/New Zealand (Melanesia, Micronesia, Polynesia, and Indonesia).

2 McKinsey Global Institute: “Urban World: Cities and the rise of the consuming class,” June 2012.

3 Franklin Templeton: Mega Trends to Consider When Planning Emerging Market Portfolios: Urbanization,” 2013

International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.

The opinions expressed are those of Nathan Chaudoin and are no guarantee of the future performance of any American Century Investments fund.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.