For over a decade, the narrative around emerging markets has been one of disappointment. Once hailed as the future growth engines of the global economy, many emerging nations now find themselves trailing behind the developed world, particularly the United States.
As China’s meteoric rise has slowed and global commodity prices have declined, many of these developing nations have faced economic stagnation or even regression. Simultaneously, the US economy, bolstered by record-breaking gains in its technology sector, has retaken center stage in the global markets.
However, now on the brink of a new global economic cycle, the tide is shifting once again in emerging markets’ favor. Savvy investors are beginning to see the resurgence of emerging markets — a shift this writer believes shouldn’t be ignored or missed.
The next five years hold immense promise for the emerging world. One recent analysis shows that the percentage of emerging markets poised to outpace the United States in per capita GDP growth is expected to surge to nearly 90%, a level not seen since the early 2000s.
What makes this resurgence so compelling isn’t just the pace of growth but the underlying financial health of many of these economies. Unlike in the 2000s, when the emerging world was largely buoyed by China’s rise and a commodity supercycle, today’s revival is arguably built on stronger economic fundamentals.
The groundwork for this comeback lies in a series of prudent economic policies adopted by many emerging markets over the past decade. Nations that were once plagued by financial instability, such as Argentina and Turkey, are now embracing reform.
Gone are the days of excessive government spending and unsustainable debt accumulation. Instead, many emerging countries have reduced budget deficits and current account imbalances, providing the financial footing to drive future economic growth.
Meanwhile, in contrast, the United States appears to be grappling with overstimulation. Record budget deficits combined with ballooning debt have cast doubt on the long-term sustainability of American economic dominance.
For decades, the US has leveraged its status as the world’s reserve currency issuer, allowing it to finance deficits and stimulate growth with few immediate consequences. But this strategy is beginning to show cracks.
The growing perception of America as an irresponsible deficit spender could have far-reaching consequences, particularly for the strength of the greenback.
Historically, periods of US dollar weakness have been favorable for emerging markets. As the dollar depreciates, capital tends to flow toward higher-growth economies with lower valuations, precisely where many emerging markets stand today.
The US stock market, particularly its tech sector, has been a magnet for investors over the past 15 years. However, with the earnings growth of major tech companies expected to decelerate significantly, the appeal of American equities is waning.
By contrast, earnings growth in many emerging markets is accelerating, yet their stock markets remain significantly undervalued relative to the US. This presents a golden opportunity for investors willing to look beyond the usual suspects in global equities.
Despite these positive developments, most global investors have yet to recognize the new potential in emerging markets. Trading volumes in many of these markets have sunk to two-decade lows, suggesting a widespread underappreciation of their improving fundamentals.
This may be due in part to lingering skepticism after the past decade’s underperformance. However, as the US faces growing fiscal challenges and the dollar loses steam, the appeal of emerging markets is becoming too obvious to ignore.
India and Saudi Arabia are among the emerging markets already showing strong performance. Both nations benefit from a robust and growing base of domestic investors, which provides stability and insulates their markets from the whims of international capital flows.
India, in particular, has emerged as a new technological powerhouse with a rapidly expanding middle class, while Saudi Arabia, driven by its ambitious Vision 2030 plan, is making significant strides in diversifying its economy beyond oil.
But the opportunities extend far beyond these two countries. Southeast Asia, Latin America and parts of Africa are home to economies that are not only growing rapidly but are also improving in terms of governance and financial stability.
Investors looking to tap into this growth story should consider a diversified approach, targeting a broad basket of emerging markets rather than concentrating on a single region.
Exchange-traded funds (ETFs) and mutual funds focused on emerging markets provide an easy way to gain exposure to a wide array of high-potential economies.
Now is the time to diversify portfolios and position for the future. Emerging markets may have been in the shadows for the past decade, but their comeback is well underway.
Global investors need to pay attention — or risk missing out on the next great growth cycle.