Emerging markets are beginning to attract attention after five tough years. Beyond the return potential, there’s another less-known benefit: investing in stocks can help improve the lives of underprivileged people across the developing world.

Researchers have spent decades studying how financial development in emerging markets trickles down to individuals in lower income classes. Countries with more developed financial markets—and sufficiently strong legal systems—have seen faster economic growth and disproportionately positive benefits for poorer individuals, according to studies.

The World Bank reported that financial development leads to “income growth, reduce[d] poverty and undernourishment, and [is] associated with better health, education, and gender equality.”1 The positive impact of financial development on the World Bank’s Millennium Development Goals, such as lowering poverty rates and child mortality, was nearly as large as the impact of economic growth, according to the report.

Capital Markets Fuel Development

But how do capital markets fit into the story? Capital markets in developing countries are sometimes characterized as stacked decks favoring economic elites, which further entrench high levels of inequality. We disagree. Of course, there are countless examples of investments in developing countries being misappropriated. In our view, however, investing in developing countries can deliver tangible benefits to lower income groups, provided the investments are carefully selected.

There is evidence to support this view. A recent academic paper analyzed data from 213 developed and developing countries over 54 years, and concluded that countries with more active stock markets had significantly lower levels of poverty and inequality.2 A one percent higher level of equity-market activity was found to be associated with a 19% higher share of the country’s income earned by the poorest decile and a 6% lower share going to the top decile (Display), even controlling for other variables like the economy’s size and growth. While the study doesn’t firmly establish causation, it nonetheless suggests that economic elites benefit much less from a dollar invested in the stock market than do those at the bottom of the pyramid.

Equity Investment Builds Infrastructure, Creates Jobs

This might seem counterintuitive. Yet there’s ample theory to support the idea that capital markets disproportionately help the poor. Well-functioning and active capital markets are efficient at directing savings to the most attractive projects and ideas—not just the best-connected individuals. If anything, entrenched economic elites in developing countries may be threatened by open and active capital markets, which have the potential to help fund innovative competitors that are capable of disrupting industries controlled by incumbents.

Equity capital in particular is good for long-lived and risky projects, which tend to be especially effective at creating the type of new formal-economy jobs which help lower income people. Since developing countries typically suffer from a lack of funding for critical infrastructure, creating bottlenecks throughout the economy, even moderate investments can make a big impact.

Social Impact and Strong Returns

Social impact and shareholder returns are often complementary. And companies that offer both can be found across disparate continents and industries, in more advanced emerging countries and frontier markets alike. For example, in Vietnam, stock-market funding has helped fuel growth at Vinamilk, the country’s leading dairy company, which has driven increased milk consumption from a very low level. By investing in modern milk processing facilities, distribution and branding, the company has been able to overcome quality concerns that historically suppressed milk consumption. Shareholders were rewarded from high levels of profitability and the company generated many new jobs for Vietnamese people.

Microfinance provides another example. In Mexico, a growing micro-lending industry has specialized in providing small loans to lower income female entrepreneurs, who typically lack access to the formal banking system. The business model, exemplified by Gentera, has generated attractive financial returns for investors while also empowering borrowers to start or grow small enterprises such as food or textile production. In turn, successful small business owners have more to spend on the health and education of their children, extending the positive social impact to future generations.

Positive social impact can be found in surprising sectors, like power generation. In Pakistan, growth has been restrained by a lack of energy supply, which has driven its once-thriving textile sector into decline. With foreign companies hesitant to build power stations in Pakistan, locally listed power generation company Hub Power is building new capacity. Its power will supply the textile sector which in turn should spur the creation of thousands of new jobs.

It’s not always easy to gauge the social impact of an equity investment in an emerging-market company. But by putting social development on the radar screen while screening for stocks with strong businesses, we believe investors can discover attractive returns—with a positive social impact to boot.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

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1 Stijn Claessens and Erik Feyen, “Financial Sector Development and the Millennium Development Goals,” (December 2006), The World Bank. Available at http://documents.worldbank.org/curated/en/689301468175151075/pdf/386880Financia101OFFICIAL0USE0ONLY1.pdf

2 Benjamin M. Blau, “Income Inequality, Poverty, and the Liquidity of Stock Markets,” (December 2015). Available at SSRN: http://ssrn.com/abstract=2708500

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