Monday 2nd of September 2024
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Over the past decade, many emerging economies have struggled, while developed countries like the United States experienced solid economic growth. However, a major shift is now underway. Emerging economies are starting to outpace developed nations in terms of growth. In fact, the percentage of emerging economies where per capita GDP (a measure of economic output per person) is expected to grow faster than in the US is set to rise dramatically. Over the next five years, this proportion is projected to reach 88%, a level not seen since the 2000s boom in emerging markets.
This new wave of growth in emerging markets is different from the last one in several important ways. Back in the 2000s, much of the growth in these countries was driven by China’s rapid economic expansion, a sharp rise in commodity prices, and easy access to money provided by Western central banks. Many believed that as long as China continued to grow, other emerging economies would follow suit. But this assumption proved overly optimistic. By 2012, it became clear that the previous decade’s growth was unsustainable, and many emerging markets struggled to maintain their momentum.
Fast forward to today, and many emerging economies are in a much stronger financial position than before. In contrast, the United States, which has been relying heavily on large deficits to fuel its growth, is on a less stable path. Emerging economies, on the other hand, have much lower budget deficits and current account deficits, giving them more room to invest in future growth. Even countries that were previously known for poor financial management, like Turkey and Argentina, have returned to more responsible economic policies.
Another key difference in the current revival of emerging markets is that their success is no longer so dependent on China. China is facing several challenges, including a shrinking population and high levels of debt, which have made it less of a driving force for global growth. Moreover, China’s increasingly nationalistic policies and tense relationships with Western countries have led many global investors to move their investments elsewhere.
This shift has benefited other emerging economies. Many of these countries are expected to see strong export growth in areas like green technologies and the raw materials needed to produce them, such as copper and lithium. These resources are primarily found in emerging markets. Additionally, the growing demand for AI-related technologies is boosting exports from countries like Korea and Taiwan, which produce chips used in AI, and from Malaysia and the Philippines, which manufacture electronics. Investment is also flowing into emerging markets that offer unique strengths, such as India’s large domestic market, Malaysia’s favourable environment for data centres, and Mexico’s proximity to the US.
As economic growth accelerates in these countries, corporate profits tend to follow. Excluding China, corporate earnings in emerging markets are currently growing at an annual rate of +19%, compared to +10% in the US. For the first time since 2009, companies in emerging markets (excluding China) have exceeded earnings expectations by a wider margin than their US counterparts. Additionally, profit margins in emerging markets have been improving.
Despite these positive trends, global stock market investors have been slow to respond. Many are still focused on large American tech companies, and as a result, trading volumes in emerging stock markets have declined significantly, reaching 20-year lows in some cases. However, there are some exceptions, such as India and Saudi Arabia, where strong and growing domestic investor bases have led to competitive gains in their stock markets.
After years of being overshadowed by the US, emerging markets are now looking like an attractive investment opportunity. Even though these countries are seeing faster earnings growth, their stock valuations are still at record lows compared to the US. For the past 15 years, the US has been delivering superior earnings growth, largely driven by big tech companies. But this trend is now shifting.
While emerging markets have faced challenges in the past decade, they are now potentially on the verge of a major resurgence. With stronger financial positions, reduced dependence on China, and growing opportunities in key industries, these economies are poised for significant growth. Investors who recognize this shift early may find themselves well-positioned to benefit from the next big wave of economic expansion in the emerging world.
We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.
Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.
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