Blue Chip Issue 78 - Jan 2021

The second main reason for the underperformance
of emerging market equities is that the growth
differential between emerging and developed
markets has reduced significantly over the past
decade (see graph 2). When China is excluded, the
differential is very close to zero over the past five
years. This collapse in emerging market growth
is due to a number of factors. While idiosyncratic
factors have played a role, specifically in various large
emerging market countries, there are also a number
of common factors at play. These include the trade
dispute between the US and China, increasing
debt levels in emerging markets, and a strong US
dollar. These have compounded to ultimately lower
emerging market GDP growth rates to levels closer
to those of developed markets.
Graph 2: GDP Growth Rates
Annual GDP Growth (%)
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If we know one thing
today it is that the
short- to medium-term
economic outlook is as
uncertain as
it has ever been.
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4
2
0
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Advanced Economies Emerging Markets EM ex China
Given the above, it may seem clear-cut that
developed market equities should be prioritised
over emerging market equities. This view is
potentially reinforced by the onset of economic
shutdowns, and the fact that emerging market
economies are likely to be more severely impacted
by economic shutdowns than their developed
market counterparts. Taking a step back, if we know
one thing today, it is that the short- to mediumterm
economic outlook is as uncertain as it has ever
been. We also know that extrapolating recent events
into the future is a sure way of being wrong. Our
memories are often short, and we forget that at the
beginning of the previous decade emerging market
equities were all the craze after their spectacular
returns of the 2000s. Given the resultant poor returns
generated by emerging markets over the 2010s
decade, today that sentiment is completely turned
on its head.
From a pure equity perspective, the emotional
response is that emerging market equities are likely
to deliver more of the same over the next 10 years.
The rational response, however, is to ensure global
diversification across markets and geographies, and
this includes emerging markets. Our experience of
the past decade should teach us that the rational
response is the more prudent one.
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