Emerging markets are drawing the attention of investors again, albeit in a muted sense. The result of the US presidential election, together with lowor negative-yielding interest rates in predominantly developed markets, may just be the boon that emerging-market assets need.
In late September, the World Economic Forum reckoned that there was $13.7tr parked in assets yielding negative returns. That is roughly the size of China’s GDP. But we will be comparing income statement with balance sheet items. For investors, and the growing ranks of pensioners in developed markets, this doesn’t bode well for the near future. As returns diminished in markets, such as the EU, Britain, Japan and the US, money managers have reached to riskier markets in a bid to gain some positive returns. These money flows to emerging markets, however, have been historically volatile. Nevertheless, $13.7tr in negative-yielding assets is an immense amount. The world is awash with cheap cash, and emerging markets – with or without each nation’s idiosyncrasies – could benefit from this vast mountain of capital.
First, though, we need to contextualise the conundrum that developed markets, and some emerging markets, find themselves in. Global government debt has ballooned over the past two decades, with a rapid increase since the failure of Lehman Brothers in 2008 and the subsequent global financial crisis. In the EU, austerity – driven by fiscally prudent nations, such as Germany, the Netherlands and Denmark, among others – took states, such as Portugal, Ireland, Italy, Greece and Spain to the fiscal brink. There was even talk that Greece may drop the euro as currency and return to the drachma. Today, among the members of the Organisation for Economic Cooperation and Development (OECD), government debt as a percentage of GDP ranges from 13% in Estonia to 237% in Japan, according to data from the OECD. Of the 33 members, 12 have seen this measure above 100%. And as government debt burgeons while politicians try to soften the monetary blow of the worldwide coronavirus pandemic, much of the easy cash has found its way into assets – listed or real – rather than into spending on consumer goods.
What does this hold for emerging markets? A look at the S&P 500, which tracks the largest US-listed stocks, and the MSCI Emerging Markets Index (MSCI EM), may show the very beginning of a rotation out of bonds (or rather when investors and pensioners are so hard up that they will risk some of their capital for at least a bit of yield) into stocks. Over the past 11 years, since November 2009, the S&P 500 rose with a cumulative 224.6%, whereas the MSCI EM – focusing on more than 1 300 large- and mid-cap companies in 26 countries – rose 23.4% cumulatively over the same period. A sign that investors may be looking at emerging markets again, is that the MSCI EM gained 30.2% cumulatively over the last six months compared with the S&P 500’s 21.1% cumulative increase. Thus, before May this year, the MSCI EM declined in dollar terms with most of non-debt investing finding its way into developed markets.
Also interesting to note, when looking at subindices of the MSCI, is where investments have found their way into developed markets. For instance, the MSCI World Index gained 7.11% annualised over the past decade compared with the MSCI North America Index’s 10.65% annualised jump. The MSCI World ex USA Index increased by a meagre 1.46% annualised over the last ten years. Since the beginning of this year, the MSCI World rose 6.09% annualised, the MSCI North America by 10.81% annualised and the MSCI World ex USA declined by 3.49% annualised, data from MSCI’s database shows (all figures in dollar terms). Thus, apart from the US, other developed markets, as measured by indices, have been struggling over the past decade and even more so since the beginning of this tough year.
Turning to emerging markets now, the past decade has looked far less attractive than for developed stock indices. On an annualised basis, the MSCI EM returned a gross 2.42% (including dividends) over the past ten years, whereas the MSCI Asia Apex 50 Index returned 9.73%. The constituents of the Apex 50, which includes the 50 largest stocks in Asia excluding Japan, has undoubtedly been a big beneficiary of emerging-market flows over the past decades. The index is heavily skewed in favour of Chinese- and Hong Kong-listed stocks, which make up eight of the top ten holdings. Alibaba and Tencent together comprise more than a third of the Apex 50.
As technology stocks in the Far East dominate the emerging-market sector, some future trends are beginning to materialise, according to large asset managers in the rest of the world.
Franklin Templeton, with $1.4tr of assets under management (including $432bn in equities), in a recent note highlighted two new trends in emerging markets, mainly in China. The first concerns early detection of disease through wearable devices.
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