It never hurts to really zoom out every now and then, to get a clearer view of the bigger picture. For example, in the ten years running up to the great financial crisis, the gap between GDP growth in emerging countries and more developed ones widened continuously. This was accompanied by a massive outperformance of EM stocks over DM stocks.
Since the financial crisis, however, the growth gap has shrunk and EM stocks have underperformed for years. So what’s next? There’s a reasonable chance that the EM/DM growth gap will start to open up again, although not to the extent we saw before 2008, with demographics and high levels of debt hampering potential DM growth.
While some emerging countries are having to deal with similar issues, the drag on growth for EM as a whole is less pronounced. Given that EM stocks are also relatively cheap compared to, for example, US stocks, emerging markets could be in for another phase of outperformance over a longer period of time.
