In the 2010s emerging stock markets had their worst decade of returns since the 1930s, and fell off the radar of global investors. Now, with valuations for many other asset classes looking historically expensive, we believe emerging markets are making a comeback. In 2021, 8 of the world’s ten best performing markets were in the developing world. We see four key trends sustaining this EM revival over the next decade.
- Manufacturing: A select few EMs are prospering as old-fashioned manufacturing success stories, including Vietnam, Bangladesh, Poland and the Czech Republic. They are among the big winners as companies seeking lower wages and shorter supply lines move factories out of China.
- Commodities: Commodity prices move in cycles of a decade or more, and all signs point to a strong revival from the downturn of the 2010s. Cutbacks in investment have tightened supply and the global economy is recovering. 2021 was the best year for commodity prices since 1973. As prices move up, they are lifting the fortunes of major commodity exporters like Brazil, Indonesia and Saudi Arabia.
- Reforms: Developed nations borrowed and spent heavily to ease the pain of lockdowns, and the resulting deficits will slow future growth. Lacking the money to spend, many emerging nations were forced to push budget and free market reform, which will lift future growth. This widely overlooked reform wave stretches from China to India, Indonesia, Egypt and the Gulf states.
- Digitization: The pandemic is accelerating the adoption of digital technology everywhere, but most dramatically in emerging markets. EMs are strikingly overrepresented in rankings of the most digitized economies, and the most rapidly digitizing economies. This revolution began in China but now extends from Latin America to Africa and East Asia and could have a sweepingly positive impact on growth.
The EM revival still has a long way to go. In the last decade, global equity investors had eyes only for mega caps in one sector, tech, and two countries, China and the United States. Imbalances this severe rarely endure, and big tech has started to correct sharply in China. Still, investors are still largely ignoring the rest of the world, particularly the emerging markets. Our research shows that the typical global portfolio allocates at most 8% to EM equities, which is roughly one half to one fifth of what the standard allocation models recommend.
Breakout Capital will offer a new opportunity to enter this underappreciated asset class, and to capitalize on the trends likely to power the emerging markets over the next 5 to 10 years.
Why Breakout Capital Now?
- Global markets were already massively distorted by asset class, country, sector, currency and company valuations, and the pandemic magnified those distortions. Even a partial return to balance would open big opportunities in emerging markets.
- Within emerging markets, the concentration of performance in a few countries and stocks creates a promising opportunity to buy high quality, fundamentally sound but grossly neglected stocks in the world’s fastest-growing economies.
The strategy targets stocks that have been ignored over the last decade but have strong franchises and can benefit from the unfolding EM revival.