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January 17, 2022

Capturing Opportunity in Fast-Changing Emerging Markets

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January 17, 2022

Capturing Opportunity in Fast-Changing Emerging Markets

Insight Article

Capturing Opportunity in Fast-Changing Emerging Markets

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January 17, 2022


Emerging markets (EM) have fallen off the radar after the worst decade for emerging stock market returns since the 1930s—and to makes matters worse, EM equities had another disappointing year in 2021. The MSCI Emerging Markets Index was down -2.5%,1 underperforming the MSCI World Index by 24%,1 due to a number of factors including: an economic slowdown driven by policy tightening, regulatory crackdown in China, inflation overhang, dollar strength, EM currency weakness and COVID-19 shocks. Several critical catalysts, however, should turn the macro environment positive for the EM asset class in 2022 and beyond with better expected outcomes than in the past decade.


Over much of the last decade, investors had eyes for only two countries, the United States and China, and mainly one sector, tech. But history shows that the hot investment themes of one decade rarely remain hot in the next decade, which is why we are expecting a revival of the rest, namely several countries outside the two superpowers, and many companies outside big tech. After such a weak decade for EM returns (Display 1), the gap between EM and U.S. valuations has never been wider, as Display 2 shows. And with the growth prospects of emerging economies, especially ex-China, rising relative to the U.S., we believe this is the time to invest in select areas of EM. These extremes are likely to normalize, closing the valuation and performance gap with the U.S.

Display 1: The 2010s: The Worst Decade for EM Equities Since the 1930s

The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results.  See Important Information section for index definitions.

Source: MSIM, Bloomberg, FactSet, Haver. Equity total returns, USD. Based on returns for the MSCI Emerging Markets Index. As of December 31, 2021.

Display 2: Relative EM Valuations at Multi-Year Lows

Emerging markets returns based on the MSCI Emerging Markets Index. U.S. returns based on the MSCI U.S. Index.

The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results.  See Important Information section for index definitions.

Source: MSIM, Bloomberg, FactSet, Haver. As of December 31, 2021.


We expect a comeback for emerging markets equities over the next five to ten years, with our top reasons summarized below.

Recovery Post Pandemic

Emerging markets lacked resources to spend their way through the pandemic and have lagged the U.S. in terms of a growth rebound. While we cannot project the path of the virus and its seemingly endless mutations, we have observed that the pandemic’s effects on emerging countries are minimizing with each wave. This is due in part to vaccinations and more widespread immunity, to the point where we expect emerging markets will have learned to live with this virus and economic life should recover.

In addition, emerging markets are in stronger positions now from an external and balance of payments standpoint, and ex-China developing countries have de-levered over the past several years. Financial stocks are one way to invest in an EM recovery as they can benefit from improving credit cycles, rising interest rates and positive yield curves. Additionally, banks with effective fintech strategies will likely be the beneficiaries of a rising demand for credit, and realize greater profitability. EM consumer themes should also perform well if domestic demand gains traction.

Pandemic-Inspired Reform Stories

History shows that developing countries reform when their backs are against the wall. Unlike in the U.S., emerging markets did not have the monetary and fiscal muscle to stimulate economies during the pandemic, forcing several EM countries to enact tough, productivity-enhancing economic reform, which should help drive future growth.

For example, in India, moves toward government divestment from the state-owned airline and the creation of a “bad bank” to address non-performing loans are positive signs. Indonesia passed an omnibus law to address labor laws and attract foreign investment, and Russia continues to maintain fiscal and monetary orthodoxy, which has materially reduced its economy’s vulnerability to oil volatility and other external shocks.

Manufacturing Success Stories

Historically, many emerging markets were able to export their way to prosperity, where manufacturing, export-oriented economies were among the growth stars. In this era of de-globalization, this path is narrowing, with increasing trade restrictions and more countries—and companies—turning inward. As manufacturing moves out of China, a few countries are emerging as winners in Southeast Asia, like Vietnam, and in Eastern Europe, like Poland. Mexico and India are also notably increasing their share of exports in the global economy.

Revival of Commodities

We believe global commodity prices are poised for a sustainable rebound. On one hand, moving to a cleaner economy and net-zero emissions is boosting demand for copper, aluminum, platinum, lithium and other “green” commodities. On the other hand, commodities have already gone through a decade of supply discipline after the boom in the 2000s, while at the same time environmental and social considerations are leading to tightening regulation and supply constraints of carbon-intensive minerals. The result is “greenflation,” an expected rise in prices for the raw materials needed in renewable energy plants, electric vehicles and other clean technologies. Rising commodity prices will benefit commodity-intensive countries and companies.

The Digital Revolution
For many decades, manufacturing has proven to be the “killer app” driving growth and convergence in emerging markets. Today, it is the digital revolution that is blossoming as a powerful growth and productivity driver. More importantly, this digital revolution is spreading in emerging markets much faster than in the developed world, as the absence of legacy infrastructure has been one of the key drivers of this rapid digital change. The adoption of smartphones, increasing bandwidth and internet usage is facilitating online shopping, banking, and the launch of new business services, all of which are helping dramatically transform domestic economies.

Similar to the U.S. and China’s internet companies, local digital companies are providing online services everywhere from Asia to South America to Africa, and are progressing just in time as manufacturing fades as a growth driver in many parts of EM. The advantage of catering to local tastes and languages creates a new and wide suite of services including search, shopping, travel, entertainment, consumer finance and other services, all while simultaneously increasing productivity.

Investment Implications

In our Emerging Markets strategies, we are actively invested in markets, themes and companies that we believe are best positioned to prosper from one or more of the five trends outlined above, across focused portfolios of quality growth stocks. We believe these growth drivers will help GDP growth differentials and equity market returns positively converge to power the emerging markets equities asset class after more than a decade of underperforming the U.S.

Specific opportunities we are looking to capitalize on include:

  1. Signs of economic recovery in select markets where we expect a greater demand for credit, particularly in countries that have avoided or cleaned up past debt problems, as in Central Europe, India and Southeast Asia.
  2. The pandemic-inspired reform efforts are widespread but perhaps most dramatic in Indonesia and India. We are seeing improving prospects for policy reform in other countries such as South Africa.
  3. The emerging markets rising as export manufacturers are concentrated in Southeast Asia and Eastern Europe, led by Vietnam and Poland.
  4. Demand for green technology is supporting select mineral stocks that are part of a carbon reduction solution, and we have our eye on countries that should benefit from rising commodity prices. For example, the move to a hydrogen economy should help boost exporters of platinum, led by countries like South Africa and Russia.
  5. Most intriguingly, the digital revolution is seeing new regional versions of the Chinese and American tech giants rise across every region in EM, from Latin America to Africa to East Asia. Digitization is creating opportunities across industries, with local and regional winners arising in areas like e-commerce, digital payments and entertainment.

Top Five Reasons for an EM Equity Comeback

  1. RECOVERY POST PANDEMIC: After lagging developed markets, emerging markets are learning to live with the virus and are in a stronger position for an economic rebound.
  2. PANDEMIC-INSPIRED REFORM STORIES: Lacking the resources to spend their way through the pandemic, many emerging world governments have been forced to enact painful but necessary economic reform, which is likely to accelerate growth in coming years.
  3. MANUFACTURING SUCCESS STORIES: Some emerging markets are still able to increase their share of global exports, a traditional source of growth for developing economies.
  4. REVIVAL OF COMMODITIES: The unfolding revival of commodity prices, in part due to “greenflation,” the rise in prices for raw materials required for green investments, is a bright sign for the many EMs that rely on commodity exports.
  5. THE DIGITAL REVOLUTION: The pandemic is accelerating the digital revolution, and one of the least understood aspects is that it is manifesting even faster in emerging markets than in developed ones.

Risk Considerations

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than the risks generally associated with investments in foreign developed countries. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Privately placed and restricted securities may be subject to resale restrictions as well as a lack of publicly available information, which will increase their illiquidity and could adversely affect the ability to value and sell them (liquidity risk). China risk. Investments in China involve risk of a total loss due to government action or inaction. Additionally, the Chinese economy is export driven and highly reliant on trade. Adverse changes to the economic conditions of its primary trading partners, such as the United States, Japan and South Korea, would adversely impact the Chinese economy and the Fund’s investments. Moreover, a slowdown in other significant economies of the world, such as the United States, the European Union and certain Asian countries, may adversely affect economic growth in China. An economic downturn in China would adversely impact the Portfolio’s investments. Risks of investing through Stock Connect. Any investments in A-shares listed and traded through Stock Connect, or on such other stock exchanges in China which participate in Stock Connect is subject to a number of restrictions that may affect the Portfolio's investments and returns. Moreover, Stock Connect A-shares generally may not be sold, purchased or otherwise transferred other than through Stock Connect in accordance with applicable rules. The Stock Connect program may be subject to further interpretation and guidance. There can be no assurance as to the program’s continued existence or whether future developments regarding the program may restrict or adversely affect the Portfolio's investments or returns.

Head of Macro and Thematic Research
Emerging Markets Equity Team
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Capturing Opportunity in Fast-Changing Emerging Markets - Video
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EM equities are poised for a comeback in 2022 and beyond. Jitania Kandhari, Head of Macro and Thematic Research for the Emerging Markets Equity team, shares five reasons why.


Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. It includes all private and public consumption, government outlays, investments and net exports. Price-Earnings (P/E) is the price of a stock divided by its earnings per share for the past 12 months. Sometimes called the multiple, P/E gives investors an idea of how much they are paying for a company’s earning power. The higher the P/E, the more investors are paying, and therefore the more earnings growth they are expecting.


The MSCI Emerging Markets Index (MSCI EM) is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance of emerging markets. The MSCI Developed Markets Index (MSCI DM) is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance of developed markets. The MSCI World Index is a free float adjusted market capitalization weighted index that is designed to measure the global equity market performance of developed markets. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The MSCI U.S. Index is designed to measure the performance of the large and mid cap segments of the U.S. market.

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