Will emerging markets outperform?
Over the next two years, emerging markets delivered a 94% total return. Looking back at the last few peaks in U.S. interest rates, it typically signals EM outperformance in the following 12 to 24 months.
Broadly, emerging markets have outperformed developed economies through the whole of 2023, with the divergence having further widened at the end of the year.
Vanguard's active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.
When basic caution is exercised, the rewards of investing in an emerging market can outweigh the risks. Despite their volatility, the most growth and the highest-returning stocks are going to be found in the fastest-growing economies.
While many parts of EM equity remain markedly under-owned despite their low cost, we expect earnings growth to be higher in EM in 2024 compared to the developed world, driven to great extent by emerging Asia and information technology companies.
The identified sectors—building materials, BFSI-NBFCs, manufacturing, autos, and ancillaries—present significant investment opportunities, supported by favourable macroeconomic factors and sector-specific tailwinds.
Of course, EM equity markets have delivered disappointing returns over the last 10 years. But rewind further to the first decade of the 21st century, and EM stocks outperformed the S&P 500 by a wide margin. Over the longer run since 2001, EM stocks have outpaced the MSCI World.
| GDP PPP rankings | 2016 rankings | 2030 rankings |
|---|---|---|
| 1 | China | 38008 |
| 2 | United States | 23475 |
| 3 | India | 19511 |
| 4 | Japan | 5606 |
Emerging markets are riskier than developed markets because they can experience political instability, illiquidity and currency volatility, and a high level of state-owned or state-run enterprise and are not suitable for all investors. As with all investing, your capital is at risk.
| Period | Average annualised return | Total return |
|---|---|---|
| Last year | 8.8% | 8.8% |
| Last 5 years | 4.2% | 23.0% |
| Last 10 years | 6.2% | 83.2% |
| Last 20 years | 7.8% | 346.1% |
How risky are emerging markets?
Economic risk.
These markets may often suffer from insufficient labor and raw materials, high inflation or deflation, unregulated markets and unsound monetary policies. All of these factors can present challenges to investors.
If a US recession is on the way would only make more of a case for greater diversification in global portfolios – a positive for emerging markets. A recession would entail lower inflation and, as a result, lower US interest rates.
| ETF | Expense ratio |
|---|---|
| Global X MSCI Argentina ETF (ARGT) | 0.59% |
| Global X MSCI China Consumer Discretionary ETF (CHIQ) | 0.65% |
| Franklin FTSE Taiwan ETF (FLTW) | 0.19% |
| Franklin FTSE India ETF (FLIN) | 0.19% |
“We expect 2024 to be the year in which emerging market profits finally lift off from 0% growth, and we expect modest outperformance,” Maasry says. In short, he believes that rising earnings growth, not low valuations, will prove the key to a comeback in emerging markets.
In short, a review of the three standard approaches to EM allocation suggest global equity investors should allocate somewhere in the range of 13% to 39% to EM. Source: FactSet, MSCI, MSIM calculations.
EM stocks are currently in one of their longest bear markets, with the MSCI Emerging Markets Index down about 40% from its February 2021 peak.
Aris Water Solutions, Inc. (NYSE:ARIS) is one of the stocks that can double in 2024, along with Wayfair Inc. (NYSE:W), Match Group, Inc. (NASDAQ:MTCH), and Palantir Technologies Inc.
| Stock | 2024 performance through Feb. 29 |
|---|---|
| Digital World Acquisition Corp. (DWAC) | 135.2% |
| Nature Wood Group Ltd. (NWGL) | 140.9% |
| Sana Biotechnology Inc. (SANA) | 146.1% |
| Super Micro Computer Inc. (SMCI) | 204.7% |
Investors looking for 10x stocks during that period will have to accept real risk. That said, trends indicate that a few sectors are best poised to produce such gains. Namely, flying cars, quantum computing and the electric vehicle (EV) industries — all ready for growth.
The Five Major Emerging Markets. Brazil, Russia, India, China, and South Africa are the biggest emerging markets in the world.
What are the next 11 emerging economies?
The Next Eleven (or N-11) are eleven countries—Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam—that Goldman Sachs investment bank says will probably become some of the world's largest economies in the 21st century, together with the BRICS.
Top Emerging Countries
BRIC countries or Brazil, Russia, India and China. These countries are currently considered the top four emerging markets.
Of course, emerging markets are riskier; their standard deviation, a measure of volatility, averaged about one-fourth higher than the S&P 500 over the past five years. So if you can't stand the risk, stay out of emerging markets. But these stocks give your portfolio a chance to get extra gains.
Because emerging markets are viewed as being riskier, they have to issue bonds that pay higher interest rates. The increased debt burden further increases borrowing costs and strengthens the potential for bankruptcy. Still, this asset class has left much of its unstable past behind.
Investment Implications. Across our multi-asset portfolios, within the equity allocation we hold between 4-5% in EMs (based on balanced portfolio). For us, this is roughly a neutral allocation.
