Of course, this is widely regarded as a somewhat disappointing conclusion, but we must consider the significant scope of the question.
Perhaps only slightly less baffling is the eternal conundrum of what it takes for emerging markets (EMs) to outperform. I could probably give you forty-two possible explanations, but I doubt I could offer a definitive response of which Deep Thought would be proud.
This is because multiple factors are at play. They include industrial productivity, valuation dynamics, foreign investor exposure, GDP growth differentials, earnings-per-share momentum, and global capital expenditure, to name just a few.
It may all sound a bit complex. It is. This is why the relative attractions of EMs at any given time are not easy to pigeonhole, much less elucidate for a broader audience.
That said, if someone were to ask me about EMs’ prospects today, I would be tempted to highlight several reasons for optimism.
Falling interest rates
Perceptions of any market are inextricably linked to events in the US. It has long been recognized that EMs’ appeal is likely to be heightened when the world’s most powerful economy is experiencing a Goldilocks scenario – which is to say it is neither too hot nor too cold.
The US Federal Reserve’s (Fed) decision to reduce interest rates for the first time in four years lends to this ideal. On the one hand, the US does not look set for an imminent downturn; on the other, capital flows into EM assets are likely to escalate as the dollar weakens and US yields lose some of their luster.
The Fed’s cut should also encourage more EM central banks to accelerate their own policy moves, especially in Asia, which should stimulate further growth in these markets.
Increasing consumption
Consumption rates in many EMs have been outpacing those in developed markets for some time. Rising incomes and expanding urbanization are among the key drivers of this trend.
Countries such as India, Indonesia, and Vietnam are already exhibiting healthy levels of economic activity. As monetary regimes continue to loosen, this could translate into greater investment over the short-to-medium term.
Looking much further ahead, spending patterns in EMs are increasingly likely to reflect those of middle-income and high-income economies. According to our projections, Asia is poised to lead the world in consumption by the middle of the century.
Improving governance
Ambitious governance and stewardship reforms in Japan began to bear fruit in 2024, enhancing businesses’ performance and stirring long-dormant investor interest. South Korea and China are among the Asian economies now trying to follow a similar path.
The former’s Corporate Value-up Program aims to bring about what South Korea’s Financial Services Commission (FSC) has called “fundamental changes in our capital markets.”1 Companies are urged to implement more shareholder-friendly policies as part of the initiative.
Meanwhile, China’s State Council wants to create “secure, regulated, transparent, open, dynamic and resilient” markets.2 With this objective in mind, struggling businesses face being delisted if they fail to improve their performance.
The artificial intelligence boom
Against the backdrop of the artificial intelligence (AI) revolution, EMs’ tech capabilities are already acknowledged as vital to global supply chains. Asia is again at the forefront in this respect.
South Korea and Taiwan are major players in semiconductor production. Thailand is making sizeable inroads in the sphere of printed circuit boards. Malaysia is establishing itself as a center of engineering and software talent. Vietnam specializes in electronics.
Crucially, investments in this arena need not be confined to titans such as a certain Taiwanese multinational semiconductor contract manufacturing and design company. Many of the region’s smaller companies are also riding the AI wave, but they have yet to register on most investors’ radars.
Looking further afield in the investment universe
This brings us back to the topic of life, the universe, and everything. Anyone keen to comprehend the breadth of the global investment landscape might wish to briefly reflect on how The Hitchhiker’s Guide to the Galaxy describes space.
“Space is big,” Prostetnic Vogon Jeltz of the Galactic Hyperspace Planning Council declares. “Really big. You just won’t believe how vastly, hugely, mind-bogglingly big it is. I mean, you may think it’s a long way down the road to the chemist’s, but that’s just peanuts to space.”
The worldwide array of investment opportunities is also more extensive than many think. Diversifying across geographies – including EMs in Asia and elsewhere – can help make portfolios more balanced and resistant to shocks, not least in volatile and uncertain times.
Importantly, diversifying within geographies can also be helpful. In EMs, as in other countries and regions, opportunities can be found throughout the market-capitalization spectrum. Smaller companies and hidden gems often represent the brightest hopes for long-term growth and performance (Chart 1).
Chart 1. Relative performance of small and large cap indices
Final thoughts
EMs should not be seen as an all-encompassing solution. Like Deep Thought’s “forty-two,” they do not hold all the answers. But there is good reason to consider them – particularly now – when seeking to unravel the enduring mysteries of successful investment.
1 "Active Support to be Provided to Promote Voluntary Efforts of Listed Companies in Enhancing Their Value." Financial Services Commission, February 2024. https://www.fsc.go.kr/eng/pr010101/81778.
2 "China to strengthen capital market regulation, risk prevention." The State Council. The People's Republic of China, April 2024. https://english.www.gov.cn/policies/policywatch/202404/13/content...html.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
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