Time to forget the forgotten EM decade


Joseph Devine

  • Managing Director, Chief Investment Officer — Global Small Cap Equity
  • Read bio

Are emerging markets (EM) about to enter another decade of disappointing returns? The fact that the final quarter of 2019 was capped off with a 31.5% run in Apple – a gain of more than $285 billion in market cap that was the equivalent of the total value of Samsung Electronics, or two PetroChinas, or four Ambevs – might suggest that the trend of developed markets outperforming emerging markets could continue. After all, emerging markets lost their luster over the past decade. The returns say it all. The 10-year cumulative return of the S&P 500® Index was 257% versus only 44% for the MSCI Emerging Markets Index (source: Bloomberg and MSCI for the period Jan. 1, 2010, through Dec. 31, 2019).

Yet if you look at the broader picture, you can see that this is simply part of a secular cycle. In the decade before that, the performance was actually reversed. The MSCI Emerging Markets Index was up 154% cumulatively from Jan. 1, 2000, through Dec. 31, 2009, while the S&P 500 Index dropped -9% on a cumulative basis for the period (source: Bloomberg and MSCI).

A tale of two decades: Developed markets versus emerging markets performance

Cumulative returns over most recent decade

(January 2010 - December 2019)

Cumulative returns over most recent decade

Cumulative returns over earlier decade

(January 2000 - December 2009)

Cumulative returns over earlier decade

Source: Bloomberg and MSCI, as of Dec. 31, 2019.

We’re potentially at an inflection point of another cycle of outperformance for EM. We think a number of factors could drive another reversal. Let’s take a look at those drivers in the context of how we got here.

What happened then: The 2000s

Around 2004, emerging markets went mainstream. China was breaking out as an economic powerhouse and every astute investor now understood the power of outsourcing and urbanization. Money flowed into EM funds. China was building “one Pittsburgh a day.” As China needed more and more oil and basic materials, the price of oil went from about $30 per barrel in 2004 to $140 per barrel in 2008, with the price of copper nearly quadrupling from $115 to $390 over the same time period (source: Bloomberg). The party was on. During the period from 2004 to mid-2008, the MSCI Emerging Markets Index outperformed the S&P 500 Index on a cumulative basis by more than 135 percentage points (source: MSCI and Bloomberg). Forecasts for ongoing EM outperformance prevailed, based on extrapolation of fundamental trends seen at the time.

I recall being at a popular EM investor conference at the beginning of 2008 where the room was full of some of the largest pension managers in the world. The mantra was “buy more EM – sell USA.” The long-term outlook for EM was never rosier. Macroeconomic experts pointed out that due to the strong natural resource exports to China, countries like Brazil and Russia were seeing sovereign debt levels disappear and posting strong current account surpluses. Because the United States was running a twin deficit and the dollar was seen negatively, the clear consensus was to sell US stocks and continue to load up on emerging markets.

EM reality sets in: The 2010s

Fast forward a little more than 10 years and, as we now know, the consensus was very wrong. The dollar surged. In emerging markets, flows reversed out, a number of the more powerful and prosperous companies of the 2000s went nowhere or down, and new companies emerged as leaders, such as Alibaba and Tencent1. Instead of urbanization, the buzz word became innovation, specifically, commercial innovation. The emphasis was on technology, especially technology designed to better sell things: ecommerce, smart phones, and social media. Money poured into the innovators.

One challenge for the EM asset class then was that most innovators were not emerging market companies. This investor appreciation for innovation throughout the decade of the 2010s made winners of big tech companies and developed markets, particularly the US, while emerging markets at times did not participate.

The next decade: is EM poised for a comeback?

Now let’s look forward. We believe that innovation will likely remain a key theme of the next decade. In fact, it may accelerate. This is coupled with consumerism, also a key theme and one that will likely find a growing audience in EM countries. The biggest consumer over the next decade, in our view, will be the millennial. We’re already seeing an EM millennial population that is larger than the entire population of the US. (The US population in 2019 was approximately 330 million. Source: United Nations.) Estimates show a combined 800 million millennials in China and India alone (sources: Bloomberg, Statista, and Kearney; see chart below).

Millennial population in key countries, 2000–2020

Millennial population in key countries

Sources: Bloomberg, Statista, and Kearney.

Combine that with another theme, localization, or the adaptation of goods and services to meet the needs of populations and cultures, and you have a powerful story for the next decade in emerging markets. Globalization is last decade. We believe localization will be key in coming years, particularly in sectors such as technology.

EM drivers: Technology, EM millennial consumers

China, currently a massive importer of technology and advanced manufacturing equipment, is a case in point for localization. Technology is now the centerpiece of modern life. Recent political developments have made China realize that national security may depend on access to some of these key technologies. If China’s technologies get shut out of the US for political reasons, it could create an economic disaster, especially as the world rolls out 5G and artificial intelligence. China must build its own tech powerhouse.

Localization not only applies to technology but also to consumer brands. We believe the next great global consumer brands will start with the local EM consumer. Another important theme is that the millennial consumer vigorously consumes digital content. In the past, content was mainly a product of Hollywood, but consumption patterns have changed. Consumer-created content is very popular in emerging markets. Millennials like to stream local consumer-created content for language and cultural reasons. The smart phone has made this possible and 5G will only make it better. This will create an opportunity for local players and local brands.

Internet penetration rates around the globe, by geographic region

Internet penetration rates

Source: Internet World Stats, as of June 2019.

Implications for the next decade

To summarize, the past decade was about innovation and technology aimed at the consumer. We see the main beneficiaries as, ultimately, US companies. The next decade, in our view, will be about the EM millennial consumer because of the size of this group, with the beneficiaries likely local companies. The next decade will also be about China’s self-reliance with advanced technologies. The entire Chinese tech supply chain will expand and benefit at the expense of foreign imports.

One indicator of an inflection point is EM valuations. A valuation comparison of the MSCI Emerging Markets Index and S&P 500 Index shows that emerging markets are cheaper, especially relative to their expected growth rate, but with comparable risk. (See chart below.) Current consensus earnings growth for 2020 in emerging markets is 15%. For the US, the consensus earnings growth is 10%. (Source: Bloomberg.) Emerging markets also trade at about a 25% discount on a forward price-to-earnings (P/E) basis (source: FactSet).

Valuation, growth, and risk

Valuation, growth, and risk

Source: FactSet, as of Dec. 31, 2019. P/E and earnings per share (EPS).

The natural market movements may help lead to a shift back to EM, which tends to move in longer-term secular cycles. But the potent combination of technological innovation and a large millennial population could be the forces that trigger the reversal.


1As of Dec. 31, 2019, the Macquarie Investment Management Emerging Markets Opportunities Equity strategy held 7.76% of Alibaba Group Holding Ltd. and 6.99% of Tencent Holdings Ltd.

The views expressed represent the investment team’s assessment of the market environment as of March 2020, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.


Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Diversification may not protect against market risk.

International investments entail risks including fluctuation in currency values, differences in accounting principles, or economic or political instability. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility, lower trading volume, and higher risk of market closures. In many emerging markets, there is substantially less publicly available information and the available information may be incomplete or misleading. Legal claims are generally more difficult to pursue.

Investing may entail geographic focus risk, or the risk that local political and economic conditions could adversely affect the performance of a strategy investing a substantial amount of assets in securities of issuers located in a single country or a limited number of countries.

Economic trend information is sourced from Bloomberg unless otherwise noted.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the US stock market.

The MSCI Emerging Markets Index represents large- and mid-cap stocks across emerging market countries worldwide. The index covers approximately 85% of the free float-adjusted market capitalization in each country. Index “net” return approximates the minimum possible dividend reinvestment, after deduction of withholding tax at the highest possible rate.

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