Over the past five years, emerging markets have gone from being universally loved to the target of broad scepticism. Over that period, the commodity super-cycle has collapsed, domestic growth has deteriorated and currency pressures have grown. As a result, EM equities have underperformed versus their developed-market counterparts.
However, we believe the long-term investment case for emerging markets could remain compelling, underpinned by favourable demographics, greater development upside, and the potential for continued GDP per capita catch-up vs. developed markets. This demographic dividend, coupled with ongoing infrastructure development, efficiency and productivity gains, and a growing middle class, remains an attractive structural growth story that can withstand periodic cyclical downturns.
Historically, investors have been rewarded for allocating to the asset class after long periods of poor performance coupled with attractive valuations. With a lot of bad news priced in, even a stabilised US dollar environment and modestly higher commodity prices could spark a meaningful improvement in emerging markets’ corporate earnings profile.
As the recovery unfolds, we view the value-oriented areas of the market as the key beneficiaries. Improvements in export competitiveness, capex discipline, M&A and political reform serve as an appealing complement to the valuation opportunity we see in the asset class today.
C. Warren Skillman and William J. Adams – The Boston Company Asset Management, a BNY Mellon company