In the first 13 years of this century, emerging market equities outperformed U.S. equities by over 7% per year. The following three years were not as kind, as emerging market assets suffered from a series of macro headwinds including weaker global growth, sharp declines in emerging market exports, a collapse in commodity prices, falling currencies, rising inflation, and capital flight as U.S. monetary policy conditions normalised.
The 2013-2015 cyclical downturn notwithstanding, the death of emerging markets has been greatly exaggerated. Today, the cyclical emerging market economic backdrop, combined with still-relatively cheap valuations, suggests that emerging market equities are poised to outperform the developed world over the next market cycle.
The cyclical case for emerging market equities is supported by the following:
- Economic growth is improving (in some instances, such as in Russia and Brazil, off of recession lows) and exceeding expectations.
- Inflation has fallen rapidly. Real interest rates are now positive in emerging markets suggesting that, this time, modest U.S. interest rate hikes will not result in significant capital flight. In addition, policymakers are better positioned to support economic growth.
- Emerging market equities are trading at attractive valuations compared to developed market equities.
- The U.S. dollar is unlikely to be a headwind for U.S.-domiciled international investors. Many of the emerging market currencies are already trading at steep discounts.
- The likelihood that a series of Fed rate hikes will derail the nascent emerging markets economic recovery is small.
Growth in developed economies is forecasted to stagnate in the coming years while emerging market growth is expected to accelerate, driven by a coming surge of labour-force-age emerging market citizens. In our view, this massive inflow of productive people in the labour force will ultimately represent one of the great investment opportunities of our lifetime.
Equities are subject to market risk and volatility; they may gain or lose value. Fixed-income investing entails credit and interest rate risks. Bonds are exposed to credit and interest rate risk. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall. Investments in securities of growth companies may be especially volatile. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks. Emerging and developing markets may be especially volatile. Eurozone investments may be subject to volatility and liquidity issues.
The mention of specific countries, regions, or sectors does not constitute a recommendation by any particular fund or by OppenheimerFunds, Inc.
This material is for informational purposes only and is not intended to be investment advice, a recommendation, or to predict or depict the performance of any investment.