With the US economy cooling down and interest rates approaching a likely peak, a new cycle in emerging markets (EM) is appearing on the horizon.
There have been two starkly different cycles in emerging markets over the past 15 years: a stellar ascent from 2003 to 2012, characterised by strong growth and high returns; and a largely disappointing era from 2013 to 2018, marked by lacklustre performance and stubborn headwinds.
For EM equities, the stellar ascent was interrupted by the global financial crisis. However, markets recovered well in 2009 to provide double-digit returns for equity investors who held their nerve across the 2003-2012 timeframe.
These earlier regimes have a lot to tell us about what to expect from the next cycle, though we think investors anticipating a repeat of either period will miss the mark.
Throughout the advances and reversals of the past decade and a half, emerging markets have been coming of age as an asset class. We believe emerging economies are well positioned having worked through fragilities in the recent cycle. Fundamentals are now in a much better position again and we believe valuations do not reflect this strength. As such, in our view, emerging market assets are poised to outperform developed markets over the next cycle.
We think it’s time to re-anchor expectations and reassess the case for emerging markets – not only as an allocation with the potential to deliver attractive risk-adjusted returns over the medium term, but also as a long-term structural holding within a broader portfolio.
In this paper, we analyse past cycles and assess what they can tell us about the next chapter in emerging markets.
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