In the first 13 years of this century, emerging market equities outperformed U.S. equities by over 7% per year. That’s almost 200% of cumulative outperformance. The following 2.5 years were not as kind to emerging market investors. Emerging market assets suffered from a series of macroeconomic 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 normalized. Just as investors were perhaps leaving emerging markets for dead, the tide meaningfully shifted.
The 2013–2015 cyclical downturn notwithstanding, the death of emerging markets has been greatly exaggerated. Today growth rates in many of the largest emerging economies is strong, commodity prices are relatively stable, currencies are supported, and inflation is under control. Meanwhile, favorable demographics and the prospect of further productivity gains in emerging economies should support growth. The cyclical emerging market economic backdrop, combined with still-relatively cheap valuations, suggests that emerging market equities are poised to continue to outperform the developed world during this market cycle.
Read on to find our views on the current economic expansion in emerging markets along with a detailed look at both equity and fixed income opportunities there.