Why Emerging Markets Will Outperform Developed Ones Going Forward

Emerging markets have strongly outperformed developed markets this year. The equity market indices of countries like China, India, Brazil, etc. are up significantly over markets in Europe, Japan and North America. Over the last 10 years, the US and Japanese equity markets were essentially flat to down. Emerging market indices have grown many times in the same period.

An IMF study published in the World Economic Outlook, September 2003 mentioned that the GDP per capita of a country is positively correlated to the change in the size of the working population. Based on this theory, developed countries are projected to have lower growth which in turn will lead to lower equity returns. One of the reasons for the low growth in developed countries is that the ratio of dependents will rise dramatically in the coming years due to declining population growth and increasing life expectancy, In the US, the era of strong participation in the workforce by the baby boomers is over. While in Europe population decline is an issue, in the U.S. the decline will not be a big one due problem to immigration and higher fertility rates. Unlike the developed world, the labor force in emerging countries is growing. By 2050 India, China and Brazil are projected to have the largest working populations in the world.

In the U.S. as baby boomers retire, they will liquidate their stocks, bonds and other assets leading to a fall in prices. In emerging markets, the working population is expected to increase more than general population growth. With high savings rates and prudent investment policies, emerging market equities may easily beat developed market equities in the future as well.

The U6 unemployment rate is over 16% in the USA. Millions of unemployed workers are unable to find well-paying jobs. Compared to this, emerging markets like India are attracting large foreign direct investments as per a research report by Morgan Stanley. This is leading to more job opportunities in many sectors. In addition to manufacturing, many emerging countries are developing their knowledge-based sectors such as biotechnology, the drug industry, mathematical analytical systems, etc. All these activities will help emerging markets beat developed markets over the next decade and beyond.

Related ETFs:

The iShares MSCI Emerging Markets Index Fund (EEM)

The iShares FTSE/Xinhua China 25 Index Fund (FXI)

The iShares Brazil Index Fund (EWZ)

Comments

[Mad Hedge F...:]

SUnfortunately, they can outperform on the downside too.

Oct 27 05:21 PM

[April May:]

Our manufacturing jobs went to those emerging markets years ago, and now our tech & finance jobs are going there. Can't blame the people there for accepting such low wages because they still believe that any job is better than no job (as some Americans are finding out now).

Oct 27 05:43 PM

[Allamad:]

GDP growth and increases in an emerging market country's equity prices not do always move in tandem. Stock prices can easily get overvalued as foreign buyers rush in at the top (and just as quickly exit when prices turn down). The overpriced Chinese stock market did nothing from 2000 to 2005 while the country's GDP grew at a 10% annual rate. Don't chase emerging market stocks after a big upmove. The best return's in emerging markets come from buying after a big drop as as export, commodity prices and the home currencies decline in fears of a global recession.

Oct 31 02:24 PM