Markets
The MSCI Emerging Markets Index (MSCI EMI) has gained +15.19% year-to-date through 10/07/2016. This is more than double the +7.16% in the S&P 500 Index over the same period. While impressive, the strength in emerging markets performance in 2016 represents a promising recovery from an anemic 5-year performance, during which the MSCI EMI produced an average annual return of only +0.69%, versus +15.73% for the S&P 500.
The rebound in EM performance is attracting new inflows, yet U.S. investors continue to invest with a strong “home bias” and hold relatively little exposure to EM. In the U.S., most aspects of the investment landscape are fully mature; equity valuations, the spending capacity of our middle class, and demographics. On a relative basis, the economic fundamentals of EM seem to offer more opportunity. Consider the following*;
- China has around 150 million people earning between US$10 and US$100 per day. This number is expected to grow to as many as 500 million over the next decade. A significant proportion of the new Chinese middle class are expected to be at the upper end of the income bracket, with impressive spending power. Similar growth rates are expected in other Asian countries ex Japan.
- India’s middle class numbers roughly 50 million people, or 5% of its population. This is projected to grow steadily over the next decade, reaching 200 million by 2020. The working-age population in India, aged 15-64, will rise by 125 million over the next decade and the country may need to create 100 million net new jobs over this period just to keep pace with its explosive population growth.
- The number of households in Mexico with annual disposable incomes over US$50,000 is expected to reach 7.1 million by 2020, and 9.4 million in Brazil. For both countries this is an increase of over 50%. Improved political stability in South America will better allow its growing middle class to be an economic engine. Both Argentina (Mauricio Macri) and Brazil (Michel Temer) are now governed by pro-growth and reformist leaders.
- Improved capital flows and currency stability, reduced reliance on commodity revenue, and lower interest rates for longer all feed into a brighter outlook for EM equities.
Investing in the growth of indigenous consumer spending in the emerging markets, including technology and e-commerce, is a wonderful long-term opportunity – and investors are taking notice. There are unique risks with investing in EM and not all strategies in this space are alike or appropriate for every investor. However, successful growth investing is described as a process of finding the point at which value and momentum intersect – exactly where emerging market equities appear to be at this stage.
*statistics from Ernst & Young
Indices mentioned are unmanaged and cannot be invested into directly
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