For much of the past 15 years emerging markets have disappointed investors, consistently underperforming developed markets and reinforcing scepticism about their long-term appeal. However, recent market behaviour is beginning to challenge that view. In dollar terms the MSCI emerging markets index gained 33.6% while the JSE delivered a 62% return — its strongest calendar-year performance since 2009.
The outperformance of emerging markets is not without precedent. After the bursting of the tech bubble in 2000 emerging markets outperformed US equities for much of the subsequent cycle. The shift has therefore revived a question for global investors: does recent US underperformance reflect a temporary pause or the early stages of a more durable move away from US exceptionalism?
The global backdrop has changed in ways that matter for capital allocation. Competition for resources, critical minerals and technological capability has intensified, increasing the strategic importance of commodity ownership. Emerging markets are better positioned than in previous cycles, particularly as demand rises from AI, digitalisation and the energy transition.
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Demand for precious metals — led by gold — has strengthened as geopolitical realignments and changing national security priorities prompt central banks to diversify reserves. A weaker dollar, with higher commodity prices, has also improved the terms of trade for some emerging economies. Macroeconomic fundamentals are more supportive than commonly assumed.
Public debt ratios across much of the emerging market universe are generally healthier than those in several developed economies, while prospective US interest rate cuts should ease financial conditions for emerging market currencies. Median emerging market GDP growth is forecast to exceed that of developed markets, with inflation increasingly converging toward developed-market levels. These improved fundamentals are reflected in emerging market bond yield spreads versus US treasuries, now near decade lows.
Rising intra-emerging-market trade has reduced reliance on developed market demand — reflected in the MSCI emerging markets index now having lower international sales exposure than some developed-market peers — and this greater external resilience, evident during recent US–China trade tensions, supports a structurally lower risk premium for select emerging market equities than in previous cycles. Emerging market equities have also been penalised for weak capital efficiency. That disadvantage is now narrowing.
While US companies still lead on return on invested capital (ROIC), much of that edge is concentrated in the “Magnificent Seven” — among the most competitively advantaged firms yet created. Adjusted for their outsized effect, emerging-market ROIC is now broadly comparable with that of the rest of the US market. This improvement is genuine.
Across operating margins, return on assets and return on equity, emerging market companies in the MSCI all country world index have made meaningful gains over the past decade. Corporate balance sheets have strengthened with lower leverage and greater financial resilience.
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