Also, the following graph shows that at times, investors are quite willing to pay higher prices for EM stocks. So, while the previous graph shows earnings will likely grow, the second graph shows valuations have room to expand over time. Both forces have the potential to drive EM stocks higher, and both are consistent with historical data.
Both iShares Core MSCI Emerging Markets (IEMG) and Vanguard FTSE Emerging Markets (VWO) have significant exposure to China, India, and Brazil. Specifically, these countries make up over 45% of IEMG and almost 54% of VWO. Consider the following statistics:
- Population of these countries is almost 3 trillion, or roughly 40% of the world (World Population Review)
- China is the 2nd biggest economy in the world, India is 7th, and Brazil is 9th (International Monetary Fund)
- With respect to stock market capitalization, China ranks 2nd, India is 8th, Brazil is 14th (World Bank)
- Emerging market economies have a real GDP growth rate of 4.9%, compared to 2.5% for advanced economies and 3.9% for the world (International Monetary Fund)
- Here are the median ages of the following countries:
- Brazil – 32 years old
- China – 37 years old
- India – 28 years old
- United States – 38 years old
- Japan – 47 years old
Quite simply, these countries are indispensable to the global economy and its future. They already represent a substantial amount of people, economic activity, and stock market value. They also have younger populations and higher rates of current and expected economic growth.
Perhaps one of the biggest drivers of long term investment performance is how investors handle underperforming assets in their portfolio. A disciplined, long term strategy mandates patience and a willingness to hold through periods of underperformance. Those who follow this course currently with emerging markets stocks are likely to be rewarded in the future.
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Source: Bloomberg for historic price and return references, as well as charts.
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