Emerging Market Stocks May Soar This Decade

Emerging Market Stocks May Soar This Decade

over 3 years ago2 mins

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One trillion-dollar fund manager is forecasting a “tidal wave” of investment into emerging market (EM) stocks over the next ten years – but the hottest companies won’t necessarily be the biggest today 🌊

What does this mean?

Invesco made the case for stocks in emerging markets – i.e. those beyond the likes of the US, Japan, and Europe – in fresh analysis out late last week. One foundational factor for increased prices is the declining international value of the US dollar. This tends to boost economic growth in EMs (where both goods and government bonds are typically priced in dollars); and with the US’s own national debt spiraling, the dollar is only expected to fall further.

When the dollar goes down, EM stocks go up (Source: Invesco)
When the dollar goes down, EM stocks go up (Source: Invesco)

But the investment manager also thinks low interest rates and energy prices will spark a hunt for returns outside the States. As foreign money floods into EMs, greater lending, spending, and employment should lead to increased company earnings in areas like Latin America and Southeast Asia, as well as parts of sub-Saharan Africa 🧳

And then there’s the biggest EM of all: China. The country already accounts for over 40% of the MSCI Emerging Markets Indexof stocks, and Invesco reckons that it’ll represent more than half of all global economic growth in the next few years. A strained relationship with the US – which it should soon overtake as the world’s largest economy – may also lead to China developing a higher-quality stock market, encouraging more domestic investment from households that are among the world’s best savers.

Why should I care?

If Invesco’s right, simply investing in an exchange-traded fund (ETF) tracking stock indexes across one or more emerging markets could help boost your portfolio’s returns over the next decade. But the firm warns that, as with Big Tech in the US, investors – and therefore indexes – may be overestimating the value of a few big names like MercadoLibre (“the Amazon of Latin America”) and Sea Group (“the Tencent of Southeast Asia”).

The evolving nature of the Chinese stock market, meanwhile, presents risks as well as opportunities. Even as more local investment flows to companies listed in both Hong Kong and mainland China, there’s growing political pressure in the US to end the trend of “American Depositary Receipts” (ADRs) allowing investors there easy, dollar-priced access to Chinese stocks ☹️

One threatened ADR that’s been very kind to investors recently is Meituan Dianping; shares of the food delivery firm have trebled in value since March…

Meituan’s ADR price (green) compared to the US S&P 500 index (red)
Meituan’s ADR price (green) compared to the US S&P 500 index (red)
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