Emerging-market equities, which have underperformed developed markets for a decade, are returning to favour. This partly reflects a superior economic backdrop in the short term: emerging economies, led by Asia, are expected to significantly outpace the advanced Western economies this year. Longer-term trends also favour Asia as it decouples from the West, and that is why many asset allocators believe that it offers significant opportunities for investors.
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Why emerging markets, particularly in Asia, are returning to favour
A tale of two decades
Investors could be forgiven for throwing in the towel on emerging markets following a long and dismal run. After the 2001–10 boom, the MSCI Emerging Markets Index delivered annualised returns of just 5.5% in US-dollar terms from 2011 to 2022. By contrast, the S&P 500 index of US equities returned an annualised 16.6%.
Figure 1: emerging equities: a reversal of fortunes
Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance does not represent actual Fund performance. For actual fund performance, please visit www.iShares.com or www.blackrock.com.
Chart description: Bar chart showing the trailing returns of the S&P 500 Index and MSCI EM Index over two separate ten-year periods.
Asia shifts gear
Many asset allocators are now turning bullish on emerging markets once again. Family offices, for example, are increasing their exposure to emerging-market equities ‘after a perceived peak in the US dollar and China’s reopening’ following the pandemic lockdowns, according to the UBS Global Family Office Report 2023, published in June 2023.1
Large institutional investors are also increasingly positive on the asset class. In its 2023 Midyear Outlook, for example, BlackRock said it favours emerging-market equities over the next six to 12 months.2 The same is true of Morgan Stanley3, Amundi4 and others.
The rationale behind this shift towards emerging markets is that growth in Asia, which accounts for around 80% of the MSCI Emerging Markets Index5, is decoupling from that of the advanced economies of the West. In effect, two parallel economic worlds are developing, where Asian growth significantly outpaces the developed economies.
That is certainly the view of the International Monetary Fund (IMF). In its World Economic Outlook, published in April 2023, the IMF forecast that the Asia-Pacific region would expand by 4.6% this year, 0.3 percentage points higher than its forecast in October 2022. Meanwhile, it expects the advanced economies to see ‘an especially pronounced growth slowdown’, from 2.7% in 2022 to 1.3% in 2023.6 Overall, the IMF expects Asia to account for 70% of global growth in 2023.
It is not just Asia’s superior growth outlook that appeals to asset allocators. In its mid-year review, BlackRock also cites ‘appealing’ valuations and the prospect that interest rates in emerging markets are nearing their peak. Morgan Stanley’s mid-year outlook says that in addition to stronger growth, lower inflation and easier monetary policy in the Asia-Pacific region – as well as reasonable valuations – ‘could deliver double-digit returns over the next 12 months’.
The rise of Asian buying power
Two long-term trends underpin the optimism about Asia’s prospects:
- Years of prudent fiscal management since the Asian financial crisis of the late 1990s mean that most Asian economies have emerged from the pandemic-related economic slowdowns relatively unscathed in terms of their fiscal accounts.7
- Asia is increasingly self-supporting and much less dependent on the health of Western advanced economies than in the past. That reflects the rise of the Asian consumer. McKinsey & Co forecasts that Asia will account for over half of global consumption by 2030.8
Asia will thus overtake America’s historic role as the world’s ‘consumer of last resort’. As Surendra Rosha, co-chief executive of HSBC Asia-Pacific points out, while Asia’s success was founded on supplying the world, the future lies in Asian demand. And that is where many of the opportunities for investors will also be found.9
1 https://www.ubs.com/global/en/family-office-uhnw/reports/global-family-office-report-2023.html
2 https://www.blackrock.com/us/individual/insights/blackrock-investment-institute/outlook
3 https://www.morganstanley.com/ideas/investment-outlook-mid-year-2023-global-risk
4 https://uk.media.amundi.com/news/2023-mid-year-global-investment-outlook-opportunities-beyond-a-precarious-growth-path-06ab-098bc.html
5 https://sicav.williamblair.com/sitefiles/auth/docs/Fund-Literature/White-Papers/2023-03_Emerging_Markets_Beyond_China.pdf
6 https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023
7 https://asia.nikkei.com/Opinion/The-future-of-the-global-economy-lies-in-Asian-demand
8 https://www.mckinsey.com/featured-insights/future-of-asia/meet-your-future-asian-consumer
9 https://asia.nikkei.com/Opinion/The-future-of-the-global-economy-lies-in-Asian-demand
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