The growth gap between emerging markets and developed markets follows a trend. Throughout the 2000’s, emerging markets began to outperform developed markets. But from 2009 to 2015 the performance gap between emerging and developed markets narrowed. However, the gap has widened since the financial crisis and emerging markets continue to outperform developed markets.
Several indicators point to attractive investment in emerging markets. Primarily, emerging markets perform best during periods of strong economic growth and when the gap between emerging market and developed market growth widens. Furthermore, The Global Investment Committee’s seven-year strategic forecast predicts a 7.5% annualized return for emerging market equities compared to a 5.5% annualized return for developed market equities. Also, emerging market equites trade at a discount to developed market equities, offering an attractive value.
The strategy involves properly gaining exposure to the emerging markets. The most common forms are through exchange-traded funds (EFTs) or mutual funds. Investment in ETFs and mutual funds focused on emerging markets in Asian countries such as India, China, Taiwan, or South Korea will provide value. Emerging markets in Asia provide a high concentration of high-growth economies, demographics, and corporate earnings.
A different strategy to invest in emerging markets is through international companies headquartered in developed markets. European companies generate 30% of revenues from emerging markets while U.S. companies generate 15%. As the United States tightens their borders, investment in European international companies in developed markets is more attractive.
Just as the growth gap between emerging and developed market growth follows a trend, so have emerging markets. Infrastructure, automotive, and healthcare were once dominant in developed markets and countries. Now these industries are the drivers for emerging markets to improve, grow and modernize. Keith Knutsson from Integrale Advisors reinforces the stability of emerging market investment. “The emerging markets will grow from a demographic shift as younger and better-educated citizens enter the workforce. This intends to drive consumption and GDP growth and filter toward attractive global investment.”