As we see it, one of the biggest advantages emerging markets have offered investors is a strong growth story: Over the past decade, growth in emerging markets has outpaced growth in developed markets by more than double. Growth in gross domestic product (GDP) looks like it will continue to outperform that of developed markets for at least the next five years, according to estimates by the International Monetary Fund.1 We are often asked why economic growth and stock market performance don’t always directly correlate in a given year, and if that’s the case, does a nation’s GDP growth matter at all when it comes to investing in equities? While it’s true that growth and stock market performance can be divergent at times, there is no question that growth matters since company earnings depend on general economic growth.
If you look at the breakdown of growth in emerging versus developed markets, you can see emerging markets have grown faster than developed markets for many years. In general, strong growth rates are regarded as a key characteristic of emerging markets. In the past 20 years, there was only one year, 1998, when growth in emerging markets lagged developed markets.2
Demographic advantages
Markets in emerging Asia as well as frontier markets in Africa have been growing even faster than the overall average for emerging markets over the past few years, and we expect that trend should continue this year. Rapid advances in technology have helped fuel the growth spurt, as emerging and frontier markets can take advantage of technological advancements while leapfrogging over the development phase; for example, bypassing bank branches and trading floors for electronic transactions. We also think a major reason for this growth is tied to demographic trends. Younger age groups generally dominate populations in emerging nations in Asia and Africa, in contrast to many parts of the developed world and even more established emerging markets such as China, which are experiencing aging populations. For example, the median age in Malaysia is 28 years and in Kenya, 19 years, while the median age in China is 37, and in Japan and Germany it is 46.3 People under the age of 40 are typically entering the most productive years of their lives; they are actively earning income and starting families. In the process, they are buying a variety of products, from consumer goods to vehicles to homes.
Case study: Argentina
Economic growth on a year-by-year basis may not necessarily result in high stock market performance, but over time improving growth should be reflected in corporate earnings. However, that still begs the question of why a country’s stock market can often move out of sync with growth trends. Argentina is an interesting case study. Despite undeniable economic malaise, Argentina’s stock market was one of the best performers globally in 2014, and the Merval Index is up more than 30% year-to-date in 2015.
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