Emerging Markets Equity: Structural Growth at the Front and Center in 2020

By Eric Dutram from DWS

Despite a variety of potential flash points in the market, 2019 was a banner year for equities. In fact, since 1970, it was one of the 12 best years for global stocks, as represented by the MSCI World (local) Index. Last year’s robust 24.86% gain was the best since 2013, and was a welcomed turnaround from the previous calendar year’s nearly double-digit percentage loss.

With such a sizable move in equities, some investors may be concerned that 2020 cannot possibly offer anything close to a similar performance. After all, 2018 was not exactly a great encore to the solid returns the previous year, while fears may be particularly heightened right now thanks to 2020’s lackluster kick-off on the back of rising geopolitical tensions. Might this signal that the full year return for the MSCI World (local) Index is likely to be disappointing as well?

Market history in focus

Since 1970, we have 11 examples of follow-up years to +20% performances from the MSCI World (local) Index. Returns were widely dispersed, but in only three cases did the index finish in the red for the year. Instead, investors were more likely to see a double-digit percentage gain from the MSCI World (local) Index the year after it gained 20% than they were to witness a losing year for the benchmark.

However, it is worth noting that in ten of the eleven years that followed a gain of twenty percent or more, performance did decline (the lone exception being 1986 which returned 27.2% compared to 1985’s 25.30%). Still, four years did offer up double-digit gains and the average for the 11 follow-up years was 6.97%, a figure which compares favorably to the MSCI World (local) Index’s longer term annualized return of 5.01%[1]. In other words, at least for this relatively small sample size, a year after a gain of at least 20% for the MSCI World (local) Index was, on average, a better than normal year for the benchmark.

Bottom line

There is no telling what is ahead for the markets in 2020. However, to think that last year’s impressive performance means that 2020 is destined for low—or even negative– returns is something that is not borne out by history.

In similar historical situations, returns have been broadly distributed, but the trend has been decidedly positive with higher than long-term averages for the benchmark. So, while a repeat +20% gain seems unlikely, another solid year for equities is by no means out of the question if the past is any guide.