The Next Emerging-Market Decade Will Be Different

For over a decade, emerging markets (EMs) have been full of promise—and disappointment. Year after year, investors have waited for the powerful growth trends of the past that drove developing markets from Mexico to Malaysia to reassert themselves. But looking back to assess the future is a questionable strategy. Instead, we think investors should focus on the changing dynamics in EM economies and markets that could reignite returns in the years ahead. Capturing this potential requires specialized research skills because EM companies and markets still march to a different beat than their developed-market (DM) peers. From Boom to Bust: Two Eras in 20 Years It’s easy to understand why expectations of EM are anchored to the past. From 2001 to 2010, as historic change swept through the developing world, the MSCI Emerging Markets Index posted supercharged annualized returns of 15.9%, outpacing DM stocks by a wide margin. Yet since 2011, EM equities have advanced by a paltry 0.9% annualized. The EM bull market of 2001–2010 was fueled by unique circumstances. China joined the World Trade Organization in 2001, increasing its share of world exports and accelerating globalization. As this played out, China made massive investments in fixed assets and real estate, unleashing a commodities supercycle. From 2000–2010, China’s GDP grew by 10.6% on average, boosting global economic activity while enriching commodity-producing EM countries and supporting their currencies. Inside China, a wave of unbridled commercialism reshaped the business landscape in a colossal cultural shift that generated handsome payoffs for astute investors. Since 2011, the EM tables have turned. Many EM economies suffered a hangover from the boom, caused by uncompetitive currencies and a failure to reform, particularly among commodity-exporting countries. Since 2014, the US dollar strengthened, eroding the competitiveness of EM exports. Commodity prices eased and geopolitical concerns intensified, from US–China trade wars to Russia’s invasion of Ukraine, while the COVID-19 pandemic added new challenges. Meanwhile, in China, annual GDP growth slowed to 6.6% from 2011–2022 and is expected to decelerate to about 4.5% in the coming years, according to consensus estimates. Under President Xi Jinping, who came to power in 2013, China began to pursue a more assertive foreign policy and domestic economic reforms. More recently, China’s government has tempered support for entrepreneurialism in favor of a broader agenda focused on social equality. Against this backdrop, EM corporate earnings suffered a lost decade ( Display ), which suppressed equity returns. A Lost Decade: EM Companies Underperformed Dramatically Past performance does not guarantee future results. Earnings growth shown for constituents of the MSCI Emerging Markets, MSCI EAFE and S&P 500 indices. EAFE is Europe, Australasia and the Far East. As of May 31, 2023 Source: Bloomberg, MSCI, S&P and AllianceBernstein (AB) What Next? Four Trends Could Revive EM Fortunes Will the next decade be as bleak for EM investors? We don’t think so. Our research shows that over the last four decades, EM stocks delivered prolonged periods of returns superior to those of DM peers ( Display ), which could materialize again after a sustained period of underperformance. Still, a potential recovery of EM stocks will be propelled by a very different set of forces. Four key trends will define the next EM era. EM Relative Performance Cycles Tend to Run for Several Years Past performance and current analysis do not guarantee future results. Developed-market equities represented by MSCI World. Emerging markets represented by MSCI Emerging Markets Price Return from its inception in January 1988 to present. Prior to this date EM equities represented by a 50/50 blend of MSCI Hong Kong and MSCI Singapore indeces. As of May 31, 2023 Source: MSCI and AB 1. Innovation Will Be the New Impetus for Growth Technology and innovation are the new engines for EM growth: they help countries leapfrog into competitive positions, empower consumers with digital capabilities and enable companies to participate in a global innovation bonanza—no matter where they are domiciled. EM countries are leapfrogging DM countries in many areas. For example, the adoption of electric vehicles (EVs) in China reached 27% in 2021, more than four times the rate in the US. In mobile payments, China is a global trendsetter. Elsewhere in Asia, digital wallets accounted for about 30% of all retail point-of-sale transactions in 2022—about three times the European rate, according to the FIS Global Payments Report. EM companies are active participants in the global technology revolution. Many components that enable AI are manufactured in EM countries. China is home to innovative companies that support global efforts to […]

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