Good afternoon, everyone. My name is Devin Dougherty. I'm a product manager for Macquarie Investment Management, and I'll be moderating today's call. So on behalf of the team, I'd like to welcome you to our second quarter Capital Markets Coaching Clinic event today. We're going to be reviewing everyone's favorite topic of discussion lately, emerging markets. Before I get started, there's a few items I want to go over. I'm going to read through this real quickly, so bear with me. But feel free to access our presentation materials from today via the resources widget to the left of the slide window. Please also submit questions via a questions widget below the slide window. If we do not get to them all today, a member of the Macquarie Investment Management team will follow up with you after the event. Upon successful completion of our full webinar today, CE credit will be reported on your behalf to IWI and the CFP Board. If we are missing any of your validation information, you'll be contacted to provide those details so that we can accurately get you your credit. So finally, in order to help us better serve you with this content in the future, we'd appreciate your feedback via our survey on the right of the slide window.
Alright, so with all that out of the way, let's get our emerging markets discussion going today. So we see EM dominating the headlines over the past year: concerns about slum global growth, trade wars, terrorists, Fed tightening, currency volatility. Basically, there's a lot going on in emerging markets these days. With all these macro drivers in the news really dominating these headlines, I think it poses a risk of overshadowing some of the opportunities that still exist in emerging markets, that, when all we see is trade, there's also a lot of really attractive drivers going on in there that we tend to forget about. Volatility is nothing new in emerging markets, and regardless of what happens in China and the US, regardless of the wins the next election in various countries, there are still companies and industries within emerging markets that really provide opportunities that you can't find anywhere else in the world. So to help us unravel today's headlines from the opportunities and better understand what's going on in emerging markets, we have two experts on emerging markets with us today from Macquarie emerging – sorry, with Macquarie Investment Management.
First, we have Dan Ko. He's based in our Boston, Massachusetts office. And Dan is a senior analyst for the Emerging Markets Equity team and the Delaware Emerging Markets Fund, symbol DEMIX. Dan's area of coverage is in Eastern Europe, Middle East, and Africa, as well as financials. Second, we also have Gabriel Wallach with us here today. He's in our San Diego, California office. Gabriel is a portfolio manager for the Global Ex-US Equity team, and he manages the Delaware International Small Cap Fund, symbol DGGIX, as well as the firm's Emerging Markets Small-Cap strategy, and as well as an all-cap EM strategy. Gabriel has a varied background but spent a significant portion of his career focused on Latin America. In terms of today's format, I'll be moderating and I'll be walking us through three main topics.
So the first topic, it's really a quick review of what's going on in emerging markets, really just to bring us up to date. And second, and this is really the focus of the presentation, is to try to help understand the opportunity that EM continues to offer that you really can't find anywhere else. And lastly, we'll end with an outlook. So without taking up any more time, we're going to get started and dive into the market review section. So when we take a look at the last year, what this chart's showing is a one-year cumulative return of the MSCI EM index versus the S&P 500® Index. There's a lot going on. We have the trade wars, concerns around slowing global growth, the Fed tightening currencies, China, elections. And at the end of all of it, there's about 12% underperformance of EM relative to the S&P. It's down about 20% from its high. So with that rosy outlook and past in mind, Gabriel, can you kind of start us out by discussing what's driving this?
Yes. Good afternoon, Devin. Again, this is Gabriel Wallach. And we have a couple of initial slides on sort of the top-down view and the scenario that we're currently experiencing in both the equity markets but specifically emerging markets. You can see two of the main drivers early on, starting in 2018, were a bit of a slowdown in growth, particularly out of China, and also the rising interest rate environment in the US which certainly is under question today and may reverse. But nevertheless, the Fed has been very aggressive in tightening rates in the US as the US was entering probably its 10th year of expansion. And then finally, the trade issues which have become much more prevalent in the last couple of quarters, certainly, versus China, but also with Mexico, have highlighted some stress between certainly the US and some of emerging markets, the largest emerging markets exporters into the United States. And we'll talk about it in more detail as to what kind of impact that may already have had or may continue to have.
But overall there has definitely been a slowdown in the growth outlook. As you're probably aware, this – with some exceptions that you see in the chart as well, some emerging markets, like Brazil, for example, have suffered quite a deep recession in the last couple of years and is starting to come out of that recession, also with their central bank easing. But definitely, the drivers which have been in place since early 2018 for emerging markets equities have been a general slowdown in growth globally, a higher cost of capital, and trade tensions between the US and its major trading partners.
Great. Thanks a lot, Gabriel. So Dan, I'm going to kick it over to you and introduce you. And if you could kind of dive into a little bit about how China is managing their slowing growth through policy?
Sure. Thanks, Devin. So I think there's a couple of interesting things to keep in mind when it comes to Chinese growth, and that's – one, the overall trend of Chinese growth slowing, it's something that we expect, and frankly, it's a healthy thing, because the growth was too fast, it was too debt-led. And it was very reliant on fixed investments, and that's clearly something where we need to see rebalancing happening, and that's going to mean slower growth overall but hopefully, more sustainable growth. The concern becomes, I think, when that growth slows too quickly. And we certainly did see a very sharp slowdown into the end of last year. Trade was part of that but it was, I would say, only part of that, in that another big reason behind that is that the Chinese government has been trying to address unsustainable lending practices, particularly in the shadow banking side of things, where there have been a lot of build-up of credit in the least years, and they've been tightening a lot on that, trying to rein in poor quality lending, and that was having a slowing impact on the economy, even where the trade war really started to heat up.
So this is one of these things as the Chinese economy is a very, very big shift indeed, and they're trying to steer it with tools, and it's not a precise thing. I think you try to steer it in one direction, and then they find they have to correct in the other. And that's kind of the situation we ended up finding ourselves going into the year end. If you look back though over what they've been doing over the last six to nine months as that growth has really slowed down, is they've definitely been leaning in the other direction. And in fact, there have been a lot of different stimulative measures that have been put forth by the government to try to soften that pace. That includes more traditional things in terms of lending. They certainly, as you can see, there's a chart of the reserve ratio, and they certainly cut reserve ratios quite a bit over the past year.
There have been other, I think, supportive measures in terms of lending, but they have been more targeted in the past. That's another thing that I think they have done that is a bit different. In the past there was very much, I think, a blunt instrument of trying to promote lending growth as a tool, and they realized that that can lead to unhealthy outcomes. So what you have seen is that they've been trying to direct more lending growth to the private sector, and they've been taking a number of other measures as well. There's a very significant amount of infrastructure spending that is going on that should be supportive for productivity. There are a number of tax cuts that are going on for individuals, for small businesses. So there's quite a number of things that they are doing. Typically, there is a lag time between implementation and when you start really affecting the economy, just as there is in the US. And so these things that they were doing six, nine, 12 months ago are really starting to, I think, have more of an impact now. But we should see that be supportive to manage the overall pace of the economic slowing.
Great. Thank you. Gabriel, can you kind of dive into trade with China and really the overarching impact of a trade war with the US has on its economy?
Yes. As you can see the following slide, and I mentioned earlier, Chinese trade has been a significant issue in the last couple of months. Just to quantify the level of trade, and this slide shows, it's about 20% of GDP, of Chinese GDP, comes from exports. It's about $430 billion. China, of course, as mentioned, has been trying to rebalance its economy for quite a few years already from just an export base to more domestically focused economy. And that means, as you can see in the chart as well, that certainly trade and manufacturing have both big fund as a percentage of GDP. Having said that, it's still quite significant, and the level of trade between the US and China is quite significant. What people a lot of times do not – or are not aware of, and I'd like to mention, is the US is of a similar size in terms of both manufacturing and global exports as China. It's actually a little bit behind China at this stage, so number two globally. But the level of trade is quite important for both markets, for both countries, and that's why these tensions have been so significant in terms of impacting the markets. So it's still significant for China, and any trade or resolution on trade issues in the next couple of weeks would be very important for that economy and that market, even though, as mentioned, it's been diversifying away from this part of the economy or this driver for economic growth.
Going on to the next slide on page 10, I'd also like to mention that – and I did allude to Brazil, but there have been other markets that have had significant issues in emerging markets over the last couple of years, although I do admit that Argentina which faced some of the most significant issues in 2018 has to some extent stabilized a little bit ahead of its October 2019 election. It's still in a recession, interest rates remain very high, there's definitely a lot of concern. One piece of good news has certainly been the inclusion in the MSCI indices where Argentina has come in very small, about half a percent, but still significant in terms of equity flows. In terms of Turkey and South Africa the news have not improved as dramatically over the last couple of months but still, as far as currency weakness, or you could look at it another way, dollar strength, which was part of the effect from the Fed funds rate rising and overall, US interest rates rising, certainly the Turkish lira and the South African rand have stabilized a little bit as interest rates have remained high in those markets, possibly going lower but still very high.
And the other effect of the problems these countries faced about 18 months ago was current account deficits which have been quite large as a percentage of GDP have also narrowed, both a result of weaker currencies and stronger exports. But overall these are definitely issues that continue to affect emerging markets, have not been the main drivers of performance at this stage. This was something that has been happening over the last, as I mentioned, 18 months, and continues to stabilize. So we look forward to focusing back on earnings growth and other factors driving the equity markets.
Great. Gabriel, Dan, thanks a lot for getting us caught up on what's going on in emerging markets. So now we're going to move to our next section and focus on the opportunities that EM presents investors. Here we'll discuss a lot of secular growth trends within EM and really the specific industries that are benefiting. Before we take a deeper dive we're going to start at a very high level. We're going to discuss really the sheer size, the scale, and the driving engine behind emerging markets. So if you go to this first slide about population potential, it really starts with the size. I think understanding the size of the population that we're talking about is really important for when we talk about the opportunity. So there's about 7.5 billion people in the world. 86% of them are in emerging markets and developing. To put this in perspective, there's about 330 million people in the US. China, there's 1.4 billion. India, 1.3 billion. So you have multiples of in terms of size in those countries alone versus the US, and it's really six times larger than developed nations. So it's a huge population but it's probably likely underallocated in your portfolio. Average portfolio, 0, 10% weight. Given the size of it, it probably deserves a little bit of attention.
The next point is that not only is EM a massive population but it's also driving a majority of the world's GDP now. About a decade ago, a little more than a decade ago, EM actually surpassed advanced-- or developed economies in terms of their proportion of the world's GDP. Currently, about 60% of the world's GDP comes from EM and developing. One-fourth comes from China and India alone, and the largest contributor is China; it's not the US. So we're seeing this large population, we're seeing a larger proportion of the world's growth being driven by emerging markets, and really, what's driving a lot of this. When we talk about emerging markets, you always hear the phrase, "The growing middle class." It gets thrown around a lot. But the question really is, "Why do we care?" Why do we continue to look at this and what are we talking about? It really matters because the growing middle class, it's the engine behind emerging markets opportunities. Over the next decade, we're going to see this transformational shift in these countries where populations, and we're talking about billions of people, will be moving into the middle class. And this is a group of people that for the first time are going to have increased discretionary income and ability to access and buy goods and services that they haven't before.
To put it in perspective let's take a look at India in the chart. So India, we have 1.3 billion people. Currently, about 14% of its population is considered middle class. By 2030 that's going to grow to about 79%. You see similar things in China. You have about a third of China's population, 1.4 billion people, and about third of that is middle class. And that's going to grow to about 72% by 2030. And we're talking over the next decade this is going to change at an extremely fast rate; we're not talking decades out. And lastly, two-thirds of the world's middle class is going to be in Asia by 2030. This is really the driving force behind emerging markets to a large extent. The middle class in these economies are growing at a 6% year-over-year growth. In developed nations, it's pretty much flat.
So when we talk about the middle class we also talk about the Internet in terms of opportunities. When you look at the Internet adoption rates within emerging countries, it varies by country but it's interesting because if you look at a country like the US, we have about 75% Internet adoption rates. So when we think about the driving forces between our economy over the last two decades, we have the Facebook, the Googles, the Microsofts, the Amazons, the eBays; they fundamentally changed our world and they've driven the market over the last decade. EM is really just getting started when we look at Internet adoption and really the availability. A country like Brazil, it actually has very good Internet adoption rates; 67% people have access to the Internet, but they're not really using it how we are in the US yet. Their ecommerce is about a decade behind the US. Juxtapose that with a country like India. India's just getting started. You have about a third of their population is using the Internet. So there's still a lot of runway to grow for some of these countries and a lot of different ways that they can adopt the Internet that will fundamentally transform how they live and work. So we discussed this at a very high level. Now I'm going to hand it over to Dan. And Dan, can you give us a deeper dive and discuss some of the opportunities in the areas of China that are really worth focusing on?
Sure. So I think we all know there's a lot going on in China, that the size of the economy in absolute terms is large. But it's also one that's changing, and it's changing in some really interesting ways that promote, I think, opportunities for companies that, in many cases, we really can't find elsewhere because of where their starting point is and because of the kind of unique development of the Chinese market. The first thing here is just a slide to maybe put into context just how big the Chinese consumer is, how important the Chinese consumer is for the world already. It's not far behind the US and, as you can clearly see, growing faster. And that's something we expect to continue to be the case, even if the overall Chinese economy is slowing down, that there's opportunity for consumption to grow a lot faster. Savings rates historically have been very high in China. There's, I think, more willingness to spend. The wage growth has certainly become much stronger. So that said, China is no longer the low-wage destination. All that translates really to increased consumer spending power, and I think when you think out over the next 10, 20 years, there's going to be two consumers that are going to matter: it's in the US and China, for the world. So it's really important to, I think, keep that in mind as we think about the future.
Another point I want to make is just about productivity and kind of do it in a way that I think that is visceral for people. I think we hear sometimes the concern with China, "Well, they invested so much but aren't they just kind of building cities nobody lives in? And is this money going to productive places?" And what we'd say is, sure, there are places where the money has been wasted but there are also some really surprising places where productivity has clearly improved. And one really interesting example of that is the Chinese rail system. What a lot of people don't realize is that the leader in high-speed rail isn't Japan or Europe anymore, it's increasingly China which literally has more high-speed rail than the rest of the world combined and is growing that quickly. Their version of high-speed rail is also quite different than ours. If you think about high-speed rail in the US it means kind of an average speed of 80 miles per hour. It's more like 200 miles per hour in China. And that's really quite phenomenal. It means that a trip that would've only been feasible by plane would take a fraction of the time normally that it would to go via a train route, something like the equivalent of New York to Chicago. You can get there in about four hours or so.
It's really, I think, changing the way that the country operates. It's creating essentially megacities out of various regions. It's allowing people to move between cities and come in and out in ways that simply weren't feasible even just a few years ago. And if we look at that and we think that that's a real change in productivity and it's quite meaningful. On the next couple of slides, this can move ahead, just to give you a little bit of a feel for that in pictures. That's a picture of Philadelphia 30th Street Station on the left, and that's a Beijing South railway station on the right. That's one of four main stations in the city, and the scale is really just pretty remarkable there and it jumps out at you. And then on the following page, on the next slide rather, you can see a network, what it looks like, snapshot today, and this is already out of doubt, but what's clearly apparent there is well, high-speed rail is really only addresses a few places in the US, a few corridors. It's increasingly crisscrossing the entire country in China, and that's something that you're only going to see continue to get built out over coming years.
Moving ahead and talking a little bit more about the Internet and opportunities there, I think in many ways, even though adoption in China is still growing, penetration is still growing, and that is certainly a growth driver on its own, in many ways the Internet and the development of the internet is leapfrogging what we see in developed markets because of the structure of the Chinese economy, because of some of the leapfrog potential that comes from, essentially, commerce growing up with the Internet instead of afterwards. And I think there's a few interesting slides we have on the following pages and maybe can talk through a little bit about that. One area where that's just very visible if you look at the statistics or when you're visiting China is in mobile payment.
Here in the US there's been certainly news flow about how we can use Apple Pay or Google Pay or Samsung Pay but most people really don't, I think, take advantage of that and use some of the alternative infrastructure that's been developed. You contrast that to in China where the mobile phone has really grown up with commerce, and the rate of adoption of e-payments on the phone is pretty remarkable. And over a very short period of time paying with your phone has basically become ubiquitous within China, such that you can buy groceries with your phone, you can do person-to-person transfers very quickly, you can buy things from vendors on the street with your phone. And increasingly, it's very difficult to use cash within China; it's quickly becoming obsolete. And I think a lot of that has to do with, again, the fact that this technology is becoming available before people have ingrained habits and there's infrastructure from other, previous cycles of development.
We see that in other places as well if we look at the next slide. This one thing that's, I think, remarkable about China and that creates a lot of opportunities here in the Internet is just the population density really is in a class of its own, and India, of course, being very large as well but following that. Chinese cities are very, very high-density. A city of a few million people is not a big city in China by their standards. And what that means is there's a lot of things that can become economic that might be more of a struggle in a less dense market. I'm sure many of you have tried online food delivery, maybe even make a regular habit of it, perhaps buy your groceries online. By and large, we're still kind of early days in terms of adoption of this within the US or Europe, and a lot of that stems from, I think, the difficulty in making the economics work for the providers, is that delivery costs are high.
In China, I think, that's quite a bit different because people are so much closer together and because they're able to generate such high order flow, the delivery couriers are able to make many more deliveries per hour than they are in a developed market. And that means that something like food delivery works very well. And if you look at the largest two food delivery companies in China, the gross merchandise volume in dollars that they do absolutely dwarfs – I think it's five or six times that of the biggest providers in the US like Uber Eats or Grubhub. Similarly, you see online grocery adoption is really starting to take off, and that's something where, again, city population density creates a unique opportunity. So I think there are a lot of things within China that are really interesting, unusual opportunities because of how the country is developing.
To maybe shift gears a little bit and just think about the consumer more broadly, not just as an Internet consumer, there, I think, are really opportunities there as well just that come from people starting to exercise that spending power and to trade up. So you may not be aware but the most popular spirit category in the world isn't whiskey, it isn't vodka. It's actually baijiu which is a Chinese spirit that's almost entirely consumed within the country. As you can see, it's hugely popular. And it's a fascinating market. This is a business where most of the volume is still in more affordable categories, but there is a really developed high end of the market: premium and super-premium, ultra-premium versions of the spirit. There's a really unique flavor profile, and there's very strong branding. And it's a market where that high end is growing very rapidly and there are huge opportunities. So I think the point here again being within a market where you see growth slowing down as a whole, there are enormous pockets of opportunity because of the absolute size and because of the development that is going on in terms of the size of the Chinese consumer in concert with the Internet.
And then moving ahead to the next slide and just taking a look at the Asia market, I think that's another interesting thing that's happening here is increasingly there are more ways for foreign investors to be able to access some of these companies as well. Most of what is in the index right now are what we call H shares, and these are Hong Kong-listed Chinese companies that are easy for foreign investors to buy. But that is changing, and over the last few years, it's become increasingly easy to buy companies that are listed directly in China, in Shanghai primarily. There are a lot of companies that are listed there. Some of them are of a more questionable quality but there are also many companies of very high quality. And this is a part of the investment universe that has now moved into the MSCI index. It's about a 3.3% weight overall and it's going to be increasing over the course of the year. And we imagine over the next several years that that will continue to move higher. So there's, I think, a lot of interesting companies that are going to become available to investors that probably many of us have not even heard of today.
Great, Dan. Thanks a lot for taking us on a deep dive into China. I actually take 30th Street Station out Philadelphia home every night so I appreciate the slide in there on that. Gabriel, let's move over to you and discuss what's going on in India and some of the opportunities that you're seeing there.
Yes. So much of what we've been discussing earlier in the presentation, the potential for growth in certain industries and certain markets that have been explored and developed is quite large. One example is certainly India. You can see on the first chart the penetration or use of the Internet is just getting started. And the reason for that is rapidly declining prices for certainly handsets and Internet access. There's been a boom in the sale of cheaper access, particularly, as I mentioned, smartphones. And that has increased dramatically. Also, the development of Internet applications such as e-commerce which has been slow has been also growing through the development and investment of, let's say, Amazon and Walmart in that market. Despite the challenges in infrastructure and delivery the growth in ecommerce is just starting as well. And there are some other factors but really the cost of access is what's really declined rapidly in India and has led to what you see in the chart in terms of the use of the Internet.
On the following chart, you can see more specific numbers. There's about 1.2 billion mobile subscribers in India today which, as you can see, is what I just mentioned, since 2005 when it was a very, very low number, that the change in price and accessibility is what in fact has changed in that market. So definitely very, very high growth, and the way investors have generally been exposed to that growth is through the hardware handset segment. However, going forward, as I said, the development of ecommerce, of other applications that are online, companies that are already existing but are moving on to a digital platform, delivery services, information services, classifieds, all of the developments that you've seen particularly in China and the US are now happening in India. So we think it's a very interesting market, primarily because of its size, as you can see here, and the rapid growth in access, but then also the very, very, very quick development and investment, aggressive investment, by companies. I alluded to Amazon which has not been investing in other markets necessarily around the world but has focused on India in its primary growth area outside of the US and Europe potentially because of this rapid growth.
The other area of growth that you can see in India and why it's such an interesting market is certainly the data consumption part. That goes hand-in-hand with the number of handsets but also development of-- already we have seen streaming services that offer entertainment, movies, etc., and that has been one reason for that access that Indian consumers have sought through their handsets in particular, if not other ways of accessing the Internet. So we were very, very positive on companies that are investing aggressively and able to monetize this rapid growth in demand for Internet access as well as e-commerce and other applications through the Internet.
Great. Thanks a lot, Gabriel. So, Dan, we hear a lot about 5G these days and how it will fundamentally change a lot of the tech that we use. Taking a step back, can you kind of put 5G perspective, where we are, why are people so excited about it, what type of opportunities are we seeing around it?
Sure. So 5G is a shift in the protocols, in the infrastructure that are being used, are going to be used for transmitting data, for essentially how you use your smartphone and how wireless connection is done more broadly. And it's really, really very much in its infancy in terms of adoption, although the standards have been set. And what it means for people more broadly is very significant increase in speed, potentially 20 times faster than the current 4G experience. It also means markedly lower latencies, so very much quicker responses between handsets and servers, and of course that means big changes, I think, in the way that people can use, consume data on the go and more broadly.
So these are, I think, big things, and there are changes that have really just started. I mean, 5G has officially launched in the US just in two cities. There are a couple cities really, I believe. Where it is being adopted most quickly though, it appears, is in Korea, which launched 5G ahead by a few hours, but it's seeing very quick take-up. Already I think they're estimating that about 10-plus %, 10 to 15% of the user base in Korea will be on 5G by the end of the year. And that is probably going to be the leader at least from a country perspective. Initial data out of Korea shows that the usage is going through the roof by – I believe, one of the operators recently said that 5G usage is averaging about 1.3, 1.4 gigabytes per day. And the typical US Internet user probably uses about 5 gigabytes a month, so it's clearly a very big step up, and I imagine that that's going to continue as people find more use cases.
So I think there are opportunities in particular markets, not just Korea. There will be certainly markets that are adopting faster. China very much has that in plans as well. There are also opportunities that are going to stem from emerging markets from providing equipment related to this. We have a number of major semiconductor companies within the global economy that are located within emerging markets, whether that be memory makers in Korea or handset makers in multiple countries, there's a lot of folks who stand to benefit from this increase in demand for data, for digitization, as well as indirectly impacted folks from the way that the business changes as accordingly. So it's an opportunity not just for emerging markets but very much so in emerging markets.
Great. Thanks a lot, Dan, extremely helpful shining some light on 5G. Now let's shift our focus to Russia. So it's been a country-- it's in the headlines a lot. We had sanctions, elections. Can you kind of shed some light on what's going at the company, industry level? That really might surprise people. Gabriel and Dan, we'll hear from both of you for this. Why don't Gabriel, let's start out with you.
Yes. Russia is actually one of our favorite markets at this point. A lot has happened in the last few years despite the sanctions, as you mentioned. Primarily-- Certainly you can't speak about Russia without mentioning oil. And energy has been, despite the volatility in oil, in ruble terms, because the ruble has weakened over the last 18 months, in ruble terms it's actually performed very well for Russia in terms of revenues. So investment by domestic industry in Russia has been quite stable if not benefiting from what they perceive to be a high oil price as Russia has worked together with OPEC to keep production tight and possibly stable. So one benefit has been the energy industry certainly. And when you look at the slide in terms of dividend yield, it is, in fact, the energy companies that are increasing pretty aggressively their payouts to investors, of which the government remains a very strong investor in some of the state-owned enterprises, like Gazprom. And I would like to mention gas as well because there are companies like Novatek that have been exploiting large fields of natural gas for export through LNG terminals and has been extremely successful in growing that part of Russia's export industry.
On the domestic side also we see quite a bit of growth in consumer stocks, Internet companies, not just search engines but also other types of ecommerce. And again, that stable environment over the last two years has allowed interest rates to come down which has resulted in a better growth environment. But what this chart again shows is Russia remains one of the cheapest markets globally, both on a P/E basis, single-digit multiples, and on a dividend yield basis which we actually project might be as high as twice the 7% rate if you look at potential payouts for 2021, '21. So companies are running with free cash flow yields in the double digits of anywhere between 12 and 20%. And so we expect this payout ratio to continue to rise which is very supportive for what is currently the cheapest market, probably outside of Korea, South Korea, in the EM world. Part of that is exposure to energy and materials but it is also something that's quite evident in other sectors. So overall it remains a very good market. Now the declining tensions between the US and Russia, let's say, it might actually lead to some of the sanctions being lifted, and that would also be a positive for that market as it relates to the cost of capital and a more stable currency. But yes, we're quite positive on Russia.
Great. Thanks a lot, Gabriel. Dan, any comments to add?
Yeah. And I certainly agree with everything Gabriel said there. I think just to add, people focus a lot on the risk with Russia, whether that be sanctions risk or whether that be kind of domestic concerns or corporate governance, but a lot of these are known risks and there also I think that the risks that you get investing in Russia are very different set of risks than you get elsewhere in the world. And there are a lot of attractions that are underneath the surface and kind of getting overshadowed by all that focus on the headlines risk. So one that Gabriel alluded to there is just capital allocation has been improving and certainly in the energy companies, but also in other areas of the economy as a result of the big recession that they experienced several years ago, really, you've seen due leveraging going on throughout the economy, everybody is cutting debt and paying out higher dividends. So there is kind of a broad basis there.
Another thing that you've seen as a result of what's gone on with sanctions is that there's a lack of foreign competition in the market. Russia used to be a place where people saw-- multinationals would look at this and say that this is a potential opportunity, they wanted to buy something or they wanted to open a business there. And that's really changed since the sanctions regime has been in place such that you have companies now that are just, I think, a lot less at risk of having a lot of foreign capital come in and compete away the returns. So that's something that's pretty interesting as well. Lastly, something that's not that much intentional at all is that there are plans in place for an enormous investment program that the government has put forth for basically $400 billion in investments that's essentially a quarter of GDP. It hasn't started yet really in terms of the spending, but this is the goal, and potentially this could be a really big impetus for economic growth that I think is not really being factored into equity prices today. So there are a lot of interesting things going on in Russia, and there are risks, but they are different risks, and known risks.
Great. Thanks a lot, Dan and Gabriel. So we have about 5 minutes left until we hit our 50-minute mark. So we covered a lot on terms of what's going on in EM over the past year that's really been driving the market. We took a deeper dive into some of the opportunities that are presented for investors. So this brings us to our outlook. So we're not going to hit all the slides but I think when we kind of look at our outlook I think it's important to look at the past a little bit. And on this slide we kind of turn this one, the tail of two decades. So if you look at 1999 to 2008, EM outperformed the US eight out of the 10 calendar years. It outperformed, to a large degree, the 10% annualized excess return above the S&P 500. So everyone loves emerging markets. Then we hit the next decade, 2009 to 2018, and we see that EM struggles to outperform the US. It only outperformed four out of 10 next calendar years, and it actually underperformed the US 5% annualized.
So this brings us to now. So I don't know what emerging markets will do the next quarter but I do know that looking over the long term, EM has largely outperformed the US so, in fact, going back to 2001 – this is the longest available data for the MSCI EM Index (net) and that goes back to January 2001 – the cumulative return for the EM index is 364%. It's only 200% for the S&P 500. So the outperformance has not been without the volatility but for the long-term investors that have been patient and willing to take a long-term call in emerging markets, they ended up outperforming the S&P 500 by 160%. So what this kind of recent underperformance over the last decade has done is it's really created a valuation imbalance. So I think in our remaining couple minutes, Dan, it's worthwhile looking at the valuation of EM versus itself historically as well as relative to the US.
Sure. So I think there are a couple interesting things to take away from this chart. And right, this is a pretty simplistic measure of evaluation. We're just looking at price to earnings ratios of EM compared to the S&P. The thing that jumps out at you, of course, is that there is a gap there, right? The S&P trades at a much higher multiple than EM. I think if you kind of dig into the components of valuation though, you find that this chart, in my mind, understates the valuation gap in a number of ways. And so why do I say that? One, it's that on the E side of things, that the margins that are essentially involved in creating those earnings are quite a bit higher relative to history in the US as they are in emerging markets. And of course, you can have a lot debate on whether that's sustainable or not, but there are certainly very different starting points in terms of the margins, particularly for some of these EM countries which have gone through quite a lot over the last several years.
Another thing that I think is worthwhile to mention is that when you look at the EM line you see that, okay, the price-to-earnings ratio is lower than it is historically but not dramatically lower. What this chart doesn't highlight to you is that the nature of the EM market has changed dramatically over the history of this chart, right? 20 years ago the type of company that was largest in the index was very different than today, right? You had a much bigger role of natural resources within the EM universe. That is still an important part of the index but the largest part of the index is actually in technology companies, and increasingly we see more large-cap technology, consumer staples companies, businesses that I think most people would argue should trade at much higher valuations given the stability and the quality of those businesses than your typical natural resource business. So there's been a dramatic improvement, I think, in the quality of the companies within the universe but you haven't seen the same kind of corresponding change in the valuations, and that's something that's pretty interesting and sometimes gets lost, I think, in all the noise, all the macro noise.
Great. Thanks a lot, Dan. Dan, can you kind of bring us to our last slide? We're going to skip a couple of these slides.
Sure. So I think things we'd like to keep in mind is firstly that yes, there is a lot of macro volatility in emerging markets, and that's by and large is par for the case. When you look back at the history in the market, it is more volatile, and that is kind of, I think, part and parcel. So that's nothing new. That being said, it is something where you also have unique opportunities that I think potentially compensate you for that. We've talked about some of those things in terms of leapfrogging and technology, in terms of the rate of data adoption, the structure of the population within these countries. And there really are unique things within EM that it's difficult to find in developed markets both in terms of scale and speed of adoption. And accordingly, focusing on the companies that are actually available to investors, and doing so with a long-term perspective, creates the opportunity to potentially pick really strong long-term winners and companies that can deliver a lot of value appreciation to people who have a perspective to see the long-term opportunity.
Great. Thanks a lot, Dan, Gabriel. This brings us to the end of our presentation. Unfortunately, we did run out of time. We did get a lot of questions from all of you, so I appreciate that. We'll make sure to follow up with you and answer your questions. So thank you again, Dan and Gabriel, for sharing this conversation with us. As a reminder, Dan Ko is a senior equity analyst for the Delaware Emerging Markets Fund, symbol DEMIX, and Gabriel Wallach is a portfolio manager for the Delaware International Small Cap Fund, symbol DGGIX, as well as our Macquarie EM small-cap strategy and the Macquarie EM opportunity strategy. For more information from the team you heard from today, please visit the resources widget. There you'll find links to our most updated digital content. For more regular commentary from our investment teams, please visit the Insight section of our website and subscribe to receive updates when new content is available. So again, I want to thank everyone, and we really appreciate your participation. Thank you.