- Emerging Markets' economic growth and stock market returns are beating developed markets.
- To date, the 21-nation MSCI EM index is up 152% from the bottom and just 12% from its 2007 peak, tied to its stellar economic performance during the recovery.
- The fact an economically sensitive category is surging despite dour headlines could be a sign investor confidence in the global recovery isn't as easily shaken today.
Sometimes, whatever the developed world can do, the Emerging Markets (EM) can do it better. So far in the recovery, EM have outpaced their developed counterparts in GDP growth, signing free-trade agreements, and even energy consumption. EM are also beating developed nations in a category pertinent to investors—stock returns.
While US markets had a spectacular September and Q3, rising 9% and 11%, respectively, the MSCI EM index notched gains of 17% for Q3. To date, the 21-nation MSCI EM index is up 152% from the bottom and just 12% from its 2007 peak, putting the market gauge far closer to its pre-bear levels than its developed peers.
The surge in EM returns isn't too surprising. EM economies—notably China—are the workhorses pulling the global recovery forward today, posting growth numbers soundly beating expectations. For example, in Q2, China grew 10.3%, while India expanded by 8.8% y/y, South Korea by 7.2% y/y, Taiwan 12.5% y/y, Thailand 9.1% y/y, Malaysia 8.9% y/y, Brazil 8.8% y/y, and Russia 5.2% y/y. Consumption is up, industrial output is up, trade flows are up, lending activity is up, etc.—all likely paving the way for continued growth.
EM stocks tend to be economically sensitive and can be more volatile—both up and down—than those of developed countries. To wit, though developed economies were at the epicenter of 2008's financial crisis, EM stocks were pummeled far worse. On the flip side of the coin (or, other side of the V-shaped recovery), EM stocks likewise blew past developed nations in the ensuing market recovery.
The fact an economically sensitive category is surging despite headlines touting big problems in major markets could be a sign investor confidence in the global recovery isn't as easily shaken today. The company EPFR Global shows US investors alone have poured $45 billion into EM equity funds this year. It would seem investors have taken note of EM growth prospects—and are letting their money speak for them.
Market leadership, much like economic leadership, changes constantly, and a well-diversified global portfolio benefits even as changes occur. Positively, today's EM growth isn't isolated to the EM nations. In today's highly globalized world, growth begets growth as demand for raw materials to finished products, labor, capital, etc., flows across borders and gives the global economy a boost. The strong economic growth that's helping advance EM shares benefits developed economies and stocks too.