The Bottom Line
- Emerging market (EM) stocks have outperformed those from developed markets in recent months as a wave of improving economic growth spreads around the globe.
- Over the past year, the MSCI Emerging Markets Index generated a total return of 31.25%—compared with 25.14% for the MSCI World Index, which tracks developed market equities.1
- By any standard, that was a healthy rise for developed stocks—indeed, the MSCI World Index recently hit a new record high.
- But the MSCI EM Index remains 16% below its record high (from May 2011)2—which suggests EM stocks might yet have more room to run over the medium term, fueled by better global growth.
- That view is supported by positive data from key EM countries. The Indian economy is growing strongly, and fears over an extreme Chinese slowdown have receded. Meanwhile, Russia is expected to emerge from recession this year.
- Earnings revisions in EM turned positive in the second quarter of last year and have continued to move higher.
- Evolving trade agreements may also provide a tailwind. The signatories of the Trans Pacific Partnership (TPP) have voted to forge ahead, despite US withdrawal; the Regional Comprehensive Economic Partnership (RCEP) will have a more immediate positive effect as it is simpler and easier to execute; and China’s ‘Belt and Road’ (B&R) has the potential transformative power of the Marshall Plan, which helped rebuild post-war western Europe.
1 Source: Bloomberg; index total return for the period 6/27/2016 through 6/27/2017 in US$ terms.
2 Source: Bloomberg. Note that for the six year period May 31, 2011 - May 31, 2017, the MSCI World Index generated an average annual total return of 8.76% compared with just 0.25% for MSCI Emerging Markets Index in US$ terms, a degree of underperformance that could favor EM over the medium term.