The teens proved to be a difficult decade for emerging markets. That setback came after EM stocks delivered strong returns in the first decade of the 2000s, as the MSCI Emerging Markets Index outperformed the S&P 500 by 11% on an average annual basis from January 1, 2000 to January 1, 2010. But over the past decade, EM equity returns proved to be disappointing, as the major EM equities index underperformed the S&P 500 by 9.8% on an average annual basis from January 1, 2010 to January 1, 2020. (Figure 1)
Figure 1: EM equities’ performance over the past decade, relative to developed markets
Cumulative returns and compound annual growth rates (CAGR) of indices from January 31, 2010 to January 1, 2020
Two key factors drove that poor performance. First, the
economic growth rates in emerging markets overall didn’t recover after the
global financial crisis of 2008-2009. The second key contributor was the
collapse in commodities prices of 2014-2015.
Key themes of the past
The poor fortunes of the emerging markets during the past
decade also put to rest many of the assumptions investors had made about EM.
- The BRICS
couldn’t continue on a strong path of economic growth and development.
The notion that all of the BRICS countries – Brazil, Russia,
India, China and South Africa – were on the same development track proved to be
Growth in Russia, Brazil and South Africa came to a halt, as
the economies were adversely affected by weak commodity prices. India continued
to be in a deep economic slump. All four of these countries were also plagued
by some combination of weak domestic savings, high levels of inequality with
low social mobility, insufficient fiscal capacity to spur their economies, and
low degrees of economic openness, the latter of which negatively impacts the
ease of exports and imports.
China’s growth rate, which had been as high at 9.5% in 2011,
slowed through the decade and hovered in the 6% range by the end of the decade.
- Even with
all its promise, China’s economy couldn’t maintain a pace of near double-digit
The slowdown in China seemed to catch some by surprise.
While China is still among the world’s fastest-growing economies, it couldn’t
sustain the torrid pace it had set previously. Some of the contributing factors
included a saturation in its share of the global export market and the fact
that its real estate and automobile sectors had reached the peak of their cycles.
While spending from the government helped bolster the
country’s flagging growth, those fiscal interventions proved to be
unsustainable in the medium term.
Themes we foresee for
the year and decade ahead
While some investors may have lost some faith in the
emerging markets, we foresee a number of trends that we think will help turn
around the fortunes of select emerging markets and reward investors who are
careful stock pickers in these regions.
growth rate will likely stabilize.
We think private investment will recover and there will be greater
geopolitical confidence along with cautious policy stimulus. We expect the
shift towards consumption and private investment in the country will
be propelled further by greater social spending in areas such as pensions and
- We expect
economic growth across EM will slowly recover.
We believe a weaker US dollar and low interest rates
globally will allow EM countries’ central banks to be more aggressive with monetary
easing. With a lower cost of capital, private sector investment will also
likely recover. We expect the global manufacturing recession will reverse. In
our view, credit markets in countries outside of China will also recover from their
current abnormally low levels.
- We believe
EM equities markets will outperform the US stock market over the next decade.
For many of the same reasons stated above – the prospect of
a weak US dollar and low global interest rates — we think the EM equities markets,
which are already relatively inexpensive, will recover in the years ahead and
potentially outperform the US stock market.
- We expect
a mean reversion in returns that will bring a market shift toward value
We foresee substantial opportunities for outsized returns in
neglected EM value stocks, as shown by the bifurcation of performance between
high-quality growth stocks and everything else from a bottom-up perspective.
For a full review of the EM myths we believed were dispelled over the past decade, along with all of our predictions for EM in the year and months ahead, be sure to view our presentation: “The Past Decade in Emerging Markets and Thoughts on the Future.”
All data is from Invesco, unless otherwise noted.
The MSCI Emerging Markets Index captures large-
and mid-cap representation across 26 Emerging Markets (EM) countries. With
1,198 constituents, the index covers approximately 85% of the
free-float-adjusted market capitalization in each country.
MSCI EAFE Index is an unmanaged index designed to represent the performance of
large and mid-cap securities across 21 developed markets, including countries
in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Foreign investments may be volatile and involve additional
expenses and special risks, including currency fluctuations, foreign taxes,
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on current market conditions and are subject to change without notice. These
opinions may differ from those of other Invesco investment professionals.
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that actual results will not differ materially from expectations.
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