EM Growth Leads to Outperformance

October 27, 2016 | David Hernandez, CFA, Director of Traditional Manager Search

After a tough 2015, emerging market (EM) equities have rebounded nicely, returning 16% through the first three quarters of the year. The asset class has benefitted from a change in the macro environment, including the stabilization and strength in commodities and currencies. Not surprisingly, GDP growth — particularly against developed countries — has started to accelerate and is expected to continue on its upward arc (shown by the blue line in the graph above).

The investment case for EM has always centered on growth and diversification. Investors look to capitalize on favorable demographics, urbanization trends, and expansion of the middle class across EM countries. EM equity’s performance versus developed markets (DM) follows closely with the difference in GDP growth between EM and DM. From 2000 to 2009 the differential grew from 1.7% to 6.3%, and outperformance followed. Since 2009 this gap has narrowed significantly, falling to 1.9% in 2015. DM largely outperformed during this time period. Looking forward, however, the IMF estimates the growth differential to widen beginning this year. This has furthered strengthened investor sentiment on the asset class and could be the start of a strong run for emerging market equities.