Is this a good time for emerging markets?

Is now the time to return to emerging markets? Six months ago, this suggestion could have been laughed at. But things are very different now, as China opens up and the developed world risks a repeat of the 2008 crisis. At this point MSCI Emerging Markets Index, expressed in dollars, is basically exactly where it was ten years ago.

However, it is worth mentioning that it was a real rollercoaster ride along the way. In 2015, the index lost a third of its value, and by February 2021 it had almost doubled from the pandemic low, but by the October Chinese Congress it had already given up almost all of these gains, only to gain almost 25% over the next three months. As you can see, for a decade, emerging markets played second fiddle to the fashionable, technology-driven US market.

While the stock markets of developing countries were sideways, with lots of sleepless nights along the way, the United States was going from strength to strength. At its peak early last year, S & P 500 has tripled since 2013. As the US benchmark fell in the first nine months of last year, the EM index followed suit, only more and more strongly.

Emerging markets, or what do we invest in?

The first thing to understand is what you get when you invest in an emerging markets fund. Emerging markets is a term used to refer to certain regions of the world due to their characteristics of economic development and financial market activity. This concept includes all countries that have found themselves on the path from a developing economy to a developed economy. Thus, an investor who sticks to the different country weights captured by the EM indices will actually have about 3/4 of their money invested in just four countries: China accounts for about a third of the MSCI Emerging Markets Index, Taiwan represents another 15%, Korea South and India each contribute about 12%. Brazylia it is the largest of the remaining countries with a share of only 5%.

So it's not many countries, but you can already see that it is quite difficult to generalize in what type of exposure one invests. Most of them are large importers of goods, one is based on exports. Therefore, demand is clearly being played on in developed countries, especially in the tech sectors.

The case for investing in emerging markets has three time horizons:

The long-term argument is one we all know. They account for: 70% of the world's population and half of its land mass; 40% of economic output; and 60% of economic growth.

• managing director International Monetary Fund (IMF) Kristalina Georgieva said on Monday that:
  

  “The global economy is estimated to grow by less than 3 percent in 2023, with India and China expected to account for half of global growth this year.”

  Perhaps the low-hanging fruits of the transition of a large number of people from rural areas to urban consumption have already been harvested,
  but the transition from low to middle and upper income is underway, creating huge opportunities in sectors targeting the growing middle class, such as consumer finance, for example.

• The second medium-term timeframe reflects the transition from the post-financial crisis era of US exceptionalism, in which the expansion of the US tech sector allowed Wall Street to flourish while the rest of the world struggled with slowed growth.
• Right now, the US seems to be losing ground compared to the emerging world, which has more sustainable debt, healthier current accounts, a more advanced inflation-fighting monetary cycle, and better demographics. Then there's the short-term issue, which has two main drivers: China's reopening and the gaping gap between US and emerging market valuations.

The recent rally in response to the recovery in China barely bridged the gap between emerging markets, which are worth about 12 times expected gains (even taking into account India's much higher rating).