Why invest in Emerging Markets?

We see three key reasons why investments in Emerging Markets should form an important part of any balanced portfolio allocation: superior trend growth, supportive demographics, and comparably low debt levels. We believe that by 2025, Emerging Markets will surpass developed markets in economic output and market capitalisation.

Superior Growth Potential

The demographic bonus advantage in Emerging Markets, as measured by the dependency ratio will continue to keep labour productivity gains at a higher pace. Overall savings rate have peaked, but the gap will continue for many years to come, helping to fund domestic investments.

Growth rate of the labour force

Productivity growth

Structural currency appreciation

Sources: UN Population Division, ILO, IMF, Spinnaker Capital

Demographics Support Asset Prices

As baby boomers reach retirement age, real stock prices tend to plateau. We have seen this in Japan, and we may be seeing it in the United States. In Emerging Markets, on the other hand, the productive share of the population will continue to grow for the next thirty years or so. Due to the capital formation of these groups in the prime savings age, there is upward pressure on real equity prices.

Japan's baby boomers peaked in 1990

Log Real Equity Prices (1950=100)

Saver-Spender ratio (rhs)

US baby boomers peaked in 2005

Saver-Spender ratio (rhs)

Log Real Equity Prices (1952=100)

EM baby boomers to peak in 2045

Saver-Spender ratio (rhs)

Log Real Equity Prices (1987=100)

The Saver-Spender Ratio shows cohorts aged 35-59, as a share of groups aged 0-24 and 65+. EM equity prices are measured in US-Dollars and deflated by US CPI. Source: UN Population Division, Goldman Sachs, Morgan Stanley, Spinnaker Capital

Lower Debt Burden

In developed markets, both the corporate and household sectors are highly indebted. During the recent financial crisis, this debt burden has in part been shifted to the public sector, leading to a rapid increase in government debt. Emerging Markets, on the other hand, face lower public and private debt levels and lower fiscal constraints. This has positive implications for EM trend growth.

Private sector debt, in percent GDP

Public sector debt, in percent GDP

Public sector debt shows general government gross debt. BRIC debt is the average of Brazil, China, India and Russia, weighted by dollar GDP at market exchange rates Sources: Eurostat, IMF, Moody’s, Morgan Stanley, OECD, Spinnaker Capital

The Rising Force in the Global Economy

Today, aggregate output in Emerging Markets is about 65% of that in developed markets, and Emerging Markets capital markets are about 22% the size of those in developed markets. In 2025, we expect Emerging Markets GDP to reach 180% of developed market output. By then, Emerging bond and equity markets could surpass the capitalisation of developed markets.

1995

2015

2025

Sources: BIS, IMF, Goldman Sachs, World Federation of Exchanges, Spinnaker Capital