A rebound for emerging markets in the 2020s?

Laying the foundations for a more successful decade following a challenging ‘teen’ period
Laying the foundations for a more successful decade following a challenging ‘teen’ period

After a difficult decade, we see causes for optimism about emerging markets (EM) in the decade ahead.


The teens proved to be a difficult decade for EM.

That setback came after EM stocks delivered strong returns in the first decade of the 2000s, as the MSCI EM Index outperformed the S&P 500 by 11% (US$ terms) on an average annual basis.1

By contrast, EM equity returns over the past ten years proved to be disappointing, as the MSCI EM Index underperformed the S&P 500 by 9.8% (US$ terms) on an average annual basis.1

Figure 1: Disappointing decade for EM equities relative to developed markets
Disappointing decade for EM equities relative to developed markets
Past performance is not a guide to future returns. Source: BofA Global Research, MSCI, FactSet, Bloomberg, as at 1 January 2020. Returns (all in US$ terms) assume dividends are not reinvested. Cumulative returns and compound annual growth rates (CAGR) of indices shown. MSCI EAFE Index covers developed countries in Europe, Australasia, Israel and the Far East.

Two key factors drove that poor performance.

  1. The economic growth rates in EM overall didn’t recover after the global financial crisis of 2008-2009.
  2. The collapse in commodities prices of 2014-2015.

Key themes of the past decade

The poor fortunes of EM during the past decade also put to rest many of the assumptions investors had made about EM.

  • The BRICS couldn’t continue a strong path of economic growth and development.

The notion that all the BRICS countries - Brazil, Russia, India, China and South Africa - were on the same development track proved to be overly optimistic.

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.1

  • Even with all its promise, China’s economy couldn’t maintain a pace of near double-digit growth.

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 EM, we foresee several trends that we think will help turn around the fortunes of select EM and reward investors who are careful stock pickers in these regions.

  • China’s growth rate will likely stabilise.

We think private investment should recover and there should be greater geopolitical confidence along with cautious policy stimulus.

We expect the shift towards consumption and private investment in the country should be propelled further by greater social spending in areas such as pensions and health care.

  • We expect economic growth across EM will slowly recover.

We believe a weaker US dollar and low interest rates globally should allow central banks in emerging countries to be more aggressive with monetary easing.

With a lower cost of capital, private sector investment should also likely recover.

We expect the global manufacturing recession to reverse.

In our view, credit markets in countries outside of China should also recover from their current abnormally low levels.

  • We believe EM equities markets could 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 equity markets, which are already relatively inexpensive, could recover in the years ahead and potentially outperform the US stock market.

  • We expect a mean reversion in returns that could 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. 


  • 1 Source: Bloomberg as at January 2020.

Investment risks

  • As a large portion of the strategy is invested in less developed countries, you should be prepared to accept significantly large fluctuations in value. The strategy may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of a portfolio. The Manager, however, will ensure that the use of derivatives does not materially alter the overall risk profile of the strategy. Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.

Important information

  • Where individuals or the business have expressed opinions, they are based on current market conditions, may differ from those of other investment professionals and are subject to change without notice. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.