Moving towards the mainstream

Stock market development and performance
in the rapid-growth markets

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Conclusion

Emerging markets move toward the mainstream, but investors must still be cautious

In just ten years, equity markets in the emerging world have flourished and become critical finance sources for EM businesses.

Over the last 25 years EM stocks have offered significantly higher average annualized returns than developed markets, particularly when emerging nations have had strong economic growth.

The main challenges for investors in EM stock markets have been variation and volatility.

EM markets are much more sensitive to global economic forces than developed markets and have offered significant variation in returns.

Markets in emerging nations are much more risky than those in developed nations, and volatility is a real problem for investors. Despite this, EM stock markets offer benefits through exposure to different economic sectors and stages of the business cycle.

Investors still need to be cautious when investing in EMs whose equities no longer appear to be the bargain they were a decade ago.

The developing market story is largely reflected in share prices, which is why price-earnings multiples are close to parity with developed market stocks.

Investors are not buying into growth, but into real companies whose returns may or may not correlate with national economic performance.

Nevertheless, today EM stocks are increasingly becoming mainstream options for global investors. This will only increase as developing economies grow and their financial markets become more integrated with the developed world’s.

Though in the past EMs rarely soared for very long before faltering, economic growth could remain much stronger in these economies relative to the developed world for many years.

It is possible that emerging economies have finally got it right, and that we can expect the higher equity returns of the last decade over a prolonged period.


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