Will Emerging Markets Continue to Outperform Developed Markets?

Emerging markets have strongly outperformed developed markets this year. The equity market indices of countries like China, India, Brazil, etc. are up significantly over markets in Europe, Japan and North America. Over the last 10 years, the US and Japanese equity markets were essentially flat to down. Emerging market indices have grown many times in the same period.

An IMF study in published in the World Economic Outlook, September 2003 mentioned that the GDP per capita of a country is positively correlated to the change in the size of the working ppopulation. Based on this theory, developed countries  are projected to have lower growth which in turn will lead to lower equity returns. One of the reasons for the low growth in developed countries is that the ratio of dependents will rise dramatically in the coming years due to declining population growth and increasing life expectancy, In the US, the era of strong participation in the workforce by the baby boomers is over. While in Europe population decline is an issue, in the U.S. the decline will not be big due problem to immigration and high fertility rates. Unlike the developed world, labor force in emerging countries are growing. By 2050 India, China and Brazil are projected to have the largest working population in the world.

In the U.S. as baby boomers retire they would liquidate their stocks, bonds and other assets leading to a fall in prices. In emerging markets the working population is expected to increase higher than the general population growth. With high savings rates, prudent investment policies,  emerging market equities may easily beat developed market equities in the future also.

The U6 unemployment rate is over 16% in the USA. Millions of unemployed workers are unable to find well-paying jobs. Compared to this, emerging markets like India are attracting large foreign direct investments  as per a research report by Morgan Stanley, This is leading to more job opportunities in many sectors. In addition to manufacturing, many emerging countries are developing their knowledge-based sectors such as bio-technology, drug industry, mathematical analytical systems, etc. All these activities will help emerging markets beat developed markets over the next decade and beyond.

Related ETFs:

The iShares MSCI Emerging Markets Index Fund (EEM)

The iShares FTSE/Xinhua China 25 Index Fund  (FXI)

The iShares Brazil Index Fund  (EWZ)

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