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The charging emerging markets bull

Published on 06-04-2024

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EM primed for outperformance


Asked to pinpoint the peak of the last emerging markets boom, an astute investor may suggest something like the second quarter of 2011. Globalization had been gathering pace since China’s 2001 entry into the World Trade Organization – a single event that plugged a vast and previously isolated country into world supply chains, unleashing some 500 million new workers into the global economy. From there, trade among nations flourished, cross-border capital flows soared, and through it all, developed countries maintained accommodative monetary policies. The collective surge seemed unstoppable. Near the top, the BRICs, that handy acronym to describe the world’s most dynamic economies, had fully worked their way into the public consciousness. And, they had impressive performance to back it all up: Many emerging market (EM) stock markets had annualized returns which were double or more the U.S. during the period. Everyone wanted a piece of the emerging markets.

Yet, as even the casual macro tourist now knows, that Eden has passed. It was an environment built on a well-oiled globalization: frictionless trade; a cooperative China and America; and, not to be missed, a naïve assumption that most EM nations would fall in line with free-market rules written by the West. That era is long over.

Since then, EMs have faced persistent headwinds. With their heavy reliance on exports and rising trade, sagging aggregate demand after the 2008 crisis hit EM nations disproportionately hard. Aggressive lockdowns in Asia and snarled supply chains during the pandemic further aggravated the trend. And, of course, hostile relations between China and America clogged the arteries of global trade. Meanwhile, the weaponization of the U.S. dollar following the outbreak of war in Ukraine diverted trade patterns and created macro distortions as EM countries scrambled to re-position and hedge against America’s financial might.

None of this has been easy for EM. And no one should be surprised that returns have languished over the last decade. But wait, what’s this? Stock markets in India, Peru, and Taiwan are all outperforming America in 2024. In fact, inclusive of frontier markets, nine of the top 10 performing equity markets this year are outside developed markets.

Does the EM bull have legs?

Readers will rightly demand answers. Can all of this continue? Consider the setup. Most Western nations continue to struggle with a series of self-inflicted wounds: high sovereign debt levels; fragmentation into squabbling trade zones; and most notably, over-stimulating during the pandemic (and entirely missing the inflationary impulse afterward). In Canada, the combination of over-indebted households and an economy reliant on real estate has created a dangerous level of interest-rate sensitivity. Even our own central bank has declared a “productivity emergency” for the nation (sigh…we could write volumes on this, but it is the subject for another “Ask Forstrong” article).

By stark comparison, most emerging markets are leaning boldly into a new world order. In fact, deep cooperation is happening across many of these nations. Multi-lateral trade agreements are being swiftly signed. Settlement of bilateral trade in national currencies other than the U.S. dollar is rapidly increasing. And, supply chain diversion is powering a manufacturing revival and investment boom outside of China.

What’s more, EM capital is moving in a way it has never done before. War and sanctions have buoyed commodity prices and profits for EM commodity exporters. During previous booms, the proceeds were always recycled back into Western markets. Not this time. Money is now heading back into domestic markets, funding all stripes of entrepreneurial dynamism. Countries that formerly grumbled about America’s privileged currency status (and did nothing) are finally pushing back.

Next time: EM resurgence leaves stock bargains on the table, as crisis-level valuations leave room for re-rating. Implications for investors.

Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. This article first appeared in Forstrong’s Insights page. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at Follow Tyler on X at @TylerMordy and @ForstrongGlobal.


Content © 2024 by Forstrong Global. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.

The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.


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