Will emerging markets outshine developed markets?

Over the past decade, developed market equities, with cumulative returns of 215%*, have significantly outperformed the 80%* returns of emerging market equities (as measured by the MSCI World and MSCI Emerging Markets index respectively). 

However, a closer look at the data reveals that, over the last ten calendar years, the fortunes of developed and emerging market equities have been more balanced than the headline figures would suggest: developed markets have outperformed in only six out of ten years**.

With lower debt, stronger growth and less inflation, it is possible to make the case that emerging markets could reverse their recent weak run. Could they even top developed markets to be the stand-out performers over the next decade?

Let’s take a look at some economic growth figures first.

The International Monetary Fund released its global growth estimates in January, projecting 3.1% growth in 2024 and 3.2% growth in 2025 – slightly higher than it predicted in 2023 due to greater resilience in the United States alongside several large emerging market and developing economies, as well as fiscal support in China***.

But how does this break down, into individual countries?

The projections show lacklustre growth for developed markets. The IMF expects the US to grow about 2.1% in 2024 but just 1.7% in 2025. The Euro area is projected to grow 0.9% in 2024 and 1.7% the following year. The UK is expected to see growth at 0.6% this year and 1.6% next year. Japan is the laggard – growth is expected to be 0.9% this year and 0.8% next year***. 

In contrast, the outlook for emerging market growth is notably higher – averaging 4.1% this year and 4.2% in 2025. Growth in emerging and developing Asia moved slightly lower, but is still forecast to be an impressive 5.2% 2024 and 4.8% 2025***. 

India is expected to grow 6.5% both years, while China’s projections are 4.6% and 4.1% respectively***. We discuss the prospects of India in a recent podcast with Goldman Sachs India Equity Portfolio. 

In sub-Saharan Africa, growth is expected to strengthen to 3.8% this year and 4.1% next year. Nevertheless, it’s not all good news. South Africa, where structural constraints and deteriorating public finances are holding back business confidence and private investment is weaker at 1% and 1.3% estimated growth for 2024 and 2025***. 

But does this matter when it comes to investments? Are the two linked?

To a degree it does matter – it certainly helps if an economy is expanding, creating a fertile environment for businesses to grow earnings and profitability. However, investors cannot automatically extrapolate strong stock market growth from strong economic growth. 

And, if the first few months of the year are anything to go by, the two areas are neck and neck in terms of performance: developed markets are up 10.8% while emerging markets are up 8.9%^. But there are still more than three-quarters of the year to go and fortunes can change very quickly. Both have a place in a portfolio. 

Here we take a look at three developed and four emerging market equity funds you may consider. 

Three developed market options

GQG Partners US Equity

An unconstrained, concentrated portfolio of high-quality US companies with durable earnings. Their focus is on forward-looking quality, rather than companies that have done well historically. This view of quality allows them to strip away labels like value and growth in favour of long-term compounding. The team’s familiarity with thousands of companies and the fund’s inherent flexibility allows them to be nimble and respond quickly to market opportunities.

CT European Select

This fund aims to provide capital growth through investment in a portfolio of predominantly large-cap European equities. Manager Ben Moore focuses on industry structure and a company’s competitive position, investing in firms that can defend their margins and industries with barriers to entry. The fund has performed particularly well in falling markets using this philosophy and represents a core European equity holding.

Adviser? Read more in this recent interview with Ben Moore

FSSA Japan Focus

This is a high-conviction fund investing predominantly in large and medium-sized Japanese companies, with a heavy emphasis on quality. This fund pays no attention to the benchmark, instead following the team’s clear philosophy and process that has proven to be so successful in other parts of Asia. This success has now been replicated in Japanese equities and we think it makes a good core option for investors wanting exposure to this part of the world.

Three emerging market options

Invesco Global Emerging Markets

This fund is a highly active fund that consists of around 50 best ideas across emerging markets. The management team has a tight focus on valuation and contrarianism that is aided by its genuinely unconstrained investment approach. The fund benefits from an adaptable investment style that allows it to exploit changing market conditions and inefficiencies effectively. The robustness of the investment process, combined with the diversity of experience among the management team has also helped deliver strong returns.

Federated Hermes Asia ex Japan Equity

A concentrated fund investing in emerging markets within the Asia ex-Japan region. Its manager is willing to buy all types of companies if the price is right. He actively invests in stocks that are currently out of favour but which he believes are likely to perform better in the future. The contrarian philosophy makes it refreshingly different to many of its peers. The process has historically worked very well with the fund delivering 173% over the last decade, compared to 108% for the sector^^.

Matthews Pacific Tiger

This is a high-conviction, low turnover portfolio with an emphasis on domestically or regionally-oriented companies that stand to benefit from the long-term evolution and growth of the Asian consumer. Although the fund can invest across all market capitalisations, it does tend to favour mid and small-cap companies, which are under-represented in the indices relative to their large-cap peers.

*Source: FE Analytics, total returns in sterling, 1 May 2014 to 30 Apr 2024

**Source: MSCI index factsheet, at 30 April 2024

***Source: IMF, World Economic Outlook, January 2024

^Source: FE Analytics, total returns in sterling, 29 December 2023 to 20 May 2024

^^Source: FE Analytics, total returns in sterling, 20 May 2014 to 20 May 2024