Is the Golden Age of Emerging Market Investing Over?

By Henry Ma, Julex Capital

Since Trump started the trade war with China at the beginning of 2018, the stock market performance has diverged significantly between the US and emerging market countries. Year to date as of October 22nd, S&P 500 Index ETF (SPY) rose 4.7%, but the MSCI Emerging Market Index ETF (EEM) tumbled by 14.2% (see Figure 1).

However, the underperformance of EM equities did not start this year, it traced back to the aftermath of the financial crisis. Since the last market peak before the financial crisis in October 2007, the S&P 500 has returned an impressive 123.9%, but the EM index is still 10.3% below the last peak.

The divergence started in mid-2011.  There are many reasons attributable to this divergence. Some are cyclical, and some are structural. The most significant cyclical factor was the massive monetary easing in the US, which helped boost the prices of every asset class.

Additionally, the slowdown in growth of the EM economies the past ten years capped the upsides of EM equities (see Table 1).

However, the structural changes in last few years could have longer and more profound impacts on the emerging market stock performance for years to come.

Let us discuss some of them here:

Table 1. Real GDP Growth US vs. EM Countries (%)

2010 2011 2012 2013 2014 2015 2016 2017
US 2.6 1.6 2.2 1.8 2.5 2.9 1.6 2.2
EM 7.4 6.4 5.3 5.1 4.7 4.3 4.4 4.7


Figure 1: S&P 500 Index ETF (SPY) vs. MSCI EM Index ETF (EEM) Performance (YTD 2018)

Figure One