Emerging market (EM) equities offers investor exposure to parts of the world where growth remains robust and valuations are not stretched.
After a four-year period of underperformance, the global disinflation trend and potential fiscal stimulus in China both offer hope of an EM rebound. But recovery is not a given. There is tremendous potential for catch up — but investors will need to assess a number of factors and risks which will determine the future of EM equities.
Emerging markets have been unloved by investors since late 2020 for two main reasons: China and inflation. China’s was afflicted by three internal setbacks: a regulatory crackdown on the technology sector, growing real estate distress, and the impact of the pandemic, where a zero covid policy was followed by a disappointing reopening. Both hampered domestic consumption.
Two external factors have not helped: Chinese reliance on trade surplus, and its geopolitical ambitions, increased tensions with the US, and Europe. Both elements have impacted equities from a market and from a fundamental standpoint.
The second channel was the macro driven. Rising inflation sparked aggressive monetary tightening, leading to a risk-off sentiment, exacerbated by Russia’s invasion of Ukraine. These factors have led to the appreciation of the US dollar and an oil price rise, and in turn greater investor scepticism towards EM financial assets, which tend to perform well in weak dollar and cheap oil environments.
The evolution of these drivers will determine whether EMs will continue to lag or will enjoy a long-awaited rebound. In particular, investors should monitor:
Figure 1: MSCI Emerging Markets and MSCI World Index Performance
In the short term, EM equity volatility will likely be driven by China fiscal policy (or lack of thereof) and by the Federal Reserve’s (Fed) monetary policy.
The nature, size and direction of China’s stimulus will be the crucial factor. Measures implemented so far include a 50bps cuts to reserve requirement ration, a similar cut on average on existing mortgages, CNY 800bn preferential lending to support buybacks, and the possibility of market stabilization fund. The stance of Chinese officials supports belief in further fiscal stimuli, with speculation of a Rmb10T ($1.4T) injection in the coming years. If that happens, a sustainable rally in Chinese equities is possible, turning the country from a laggard to a leader within the EM universe. Lack of concrete action would likely largely reverse September’s rebound.
US disinflation and Fed monetary policy are also pivotal. The US easing cycle allows developing economy central banks to cut interest rates without depreciating local currencies too much against the US dollar. With rates in the US in the restrictive territory, monetary easing should continue supporting both EM equities and economies over the months ahead. Key EM currencies remain below pre COVID level, suggesting there may be a potential for reappreciation given policy normalization in the US.
Figure 2: EM Currency Returns Against the US Dollar
Investors are likely to continue to search for opportunities within emerging markets as these remain a pocket of growth in a world where developed economies (ex-US) are struggling to expand at a reasonable pace. China GDP is likely to continue to decelerate, although the 4.1%-4.8% growth rates penciled in by economists for the next three years are materially higher than 1.7%-1.9% forecasted for developed economies. India has taken the growth leader baton, and expanded by 8.2% in FY23-24. It’s now expected to grow at 6.9% in FY25 and 6.6% in FY26. Either way, EM Asia countries, with the “Big 4” being China, India, Taiwan and South Korea, remain the engine of the global growth (ex US?). They continue to dominate market-cap-weighted indices, representing 79% of the MSCI EM Index and 77% of the MSCI EM Small Cap Index1. Key LatAm and EMEA EM economies, i.e., Brazil, South Africa, Mexico, and Saudi Arabia, are also expected to grow faster than most developed markets.
Figure 3: Forecasted Real GDP Growth
Institutional investors remain underweight in EM equities as shown in the Q4 Sector & Equity Compass. We believe that under a supportive market scenario, there is ample room for an upward move as investors may be keen to at least partially close their underweight positions. Material fiscal stimulus in China and continued easing in the US would likely improve EM equity sentiment.
Figure 4: Institutional Positioning
Large-cap equities in developed markets have rerated, reflecting soft landing and monetary easing expectations. Elevated multiples of developed large-cap equities limit the upside potential and introduce a level of vulnerability to any news flow that could undermine optimistic earnings growth expectations. In contrast, emerging markets trade at relatively undemanding P/E multiples — making them an appealing tool to play a “risk on” market scenario.
Figure 5: MSCI EM vs MSCI World P/E (1Y Forward)
Sell-side analysts expect an earnings rebound for the MSCI EM Index from 2023’s low levels, when aggregated earnings contracted. Given the relative strength of underlying economies and the broader soft landing expectations, the EPS growth outlook for 2025-2026 does not look stretched. Bottom line earnings in the long term will be determined by macro and geopolitical factors. Upside and downside revisions are highly probable, with volatility most likely coming from China.
Figure 6: EPS Growth Forecasts
EM equities have ample room for an upside move, but investors need to be equally aware of risks and headwinds which are very much present. China's scrutiny of its own technology sector and private sector in general may reemerge at any moment. It’s hard to predict a repeat, but investors should not forget the technology crackdown which sunk Alibaba, Tencent, Meituan and many other companies between 2020 and 2023.
China’s housing sector remains troubled and is over-levered. Lack of stimulus or a delay in stimulus increases the risk of deepening crisis across developers — and further deterioration in consumer sentiment.
Finally, China’s geopolitical stance has become more hostile to the US and Europe. This risks increased tariffs, particularly in the automotive sector. A broader deterioration in the geopolitical landscape, such as an escalation of conflicts in the Middle East, would be negative for EMs as a whole as it would dent investor sentiment.
Reflation in the US is a key external risk. We do not expect it as our base case scenario but reflation would likely lead to re-strengthening of the US dollar with all negative consequences which EM currencies and economies faced during the past few years.
Emerging markets are very heterogenous and the inflation challenge is not uniform. India is facing elevated inflation but monetary policy is already restrictive, and India’s economy is still expanding rapidly. Inflation in three other key markets — China, Taiwan and South Korea — is contained and not an imminent threat. Brazil is the exception, as the central bank has recently hiked interest rates for the first time in two and a half years. With that in mind, Brazil represents only 5% of the MSCI EM Index and 3% of the MSCI EM Small Cap Index. We do not see inflation as a main short-term threat for EM economies.
EM equities offer several merits which developed markets do not — including undemanding valuations, economic growth advantage, and catch-up potential. At the same time we believe EMs are at a crossroads and investors may want to position for an outcome they deem most probable. There are a variety of EM exposures which can be utilised to position for specific scenarios. The MSCI EM Index is the more broad exposure, with South East Asia representing 79% of the index. Most relevant countries in EMEA and LatAm, i.e., Brazil, South Africa, Saudia Arabia, and Mexico, complement APAC exposure with a commodity cushion.
SPYM GY
SPF7 GY
Investors with high conviction regarding fiscal stimulus in China may find MSCI EM Asia the most attractive solution because the country accounts for nearly 35% of the index. EM Asia exposure offers concentration on the engine of the global growth because China, India, Taiwan, and South Korea account for 94% of the index in total2.
SPYA GY
The MSCI EM Small Cap Index lies on the other side of the spectrum. It is heavily underweight China (9% of the index) and overweight India (30% of the index). It has been and remains a very interesting tool for investors who would like to embrace opportunities stemming from economic growth of emerging markets but who are more sceptical about prospects of stimulus in China.
SPYX GY
Emerging markets Dividend Aristocrats offer access to higher quality and more defensive stocks with proven ability to generate cash flow in a sustainable manner. As its exposure to China’s technology sector in China is non-existent, EM Dividend Aristocrats investors can play China’s rebound without much worry about potential regulatory scrutiny of the technology sector. Valuations are even more appealing than in the broad EM index.
SPYV GY
Figure 7: Country Exposure
Figure 8: Sector Exposure
Figure 9: ETF Characteristics
IMPORTANT ACCESS DISCLOSURE
By clicking "Accept and Continue", I confirm that I have read and accept the terms and conditions of using this website (including our privacy & cookie policy) and that I am based in Austria and am an institutional investor, as that term is understood under the laws of Austria. We use cookies to improve your experience on our websites. By continuing you are giving consent to cookies being used.
By accessing this section of the website, you are confirming that you are authorised to conduct investment business in Austria, and that you are authorised under the laws of Austria to handle material relating to investments, investment views and research that are made available only to professional investors.
Please read this page before proceeding, as it explains certain restrictions imposed by law on the distribution of this information and the countries in which the funds and advisory products and services are authorised for sale. By proceeding, you are confirming you understand that State Street Global Advisors (“SSGA”), a division of State Street Bank and Trust Company, makes no representation that the content of the website is appropriate for use in all locations, or that the transactions, securities, products, instruments or services discussed at this website are available or appropriate for sale or use in all jurisdictions or countries, or by all investors or counterparties.
The information contained on this Site is intended solely for use by Institutional Investors based in Germany and Austria and is not intended to be accessed by any other person, e.g. individual investors. It is also not made available to persons resident in any other jurisdiction, including the United States of America. The content of the Site is not an invitation to subscribe for shares of any Fund whose details are contained on this Site.
Institutional Investors within the meaning of these terms and conditions are only a) credit institutions, b) investment firms, c) other authorised or regulated financial institutions, d) insurance companies, e) collective investment schemes and management companies of such schemes and f) Pension funds and management companies of such funds, each of the foregoing within the meaning of Section I paragraph 1 lit. a) to f) of Annex II to the Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, respectively.
By accessing this website, you are confirming that you agree to the Terms and Conditions of this website and that you are based in Austria and are (or are acting on behalf of) a professional investor.
The contents of this website have been prepared for informational purposes only without regard to the investment objectives, financial situation, or means of any particular person or entity, and SSGA is not soliciting any action based upon them. No information included on this website is to be construed as investment advice or as a recommendation or a representation about the suitability or appropriateness of any fund or advisory product or service; or an offer to buy or sell, or the solicitation of an offer to buy or sell, any security, financial product, or instrument; or to participate in any particular trading strategy. SSGA recommends that you seek independent financial and tax and tax advice before making any investment decisions. Investment in any of the funds described in this website should only be made on the basis of the terms and conditions of the most recent applicable offering documents (including any relevant supplements). Investment in any of the advisory products or services described in this website should only be made on the basis of the terms and conditions of the related investment management agreement.
All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Some of the content on this website may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. From time to time, SSGA may also make additional features available to users on this website on such terms and conditions as may be set forth in a modification to this Agreement or otherwise on the SSGA website.
GENERAL RISK FACTORS
You should be aware that past performance is not a reliable indicator of future performance. Please note that the price of investments and the income from them can fall as well as rise and you may not get back the amount originally invested. Income receivable may vary from the amount of income projected at the time of making the investment.
Exchange rate fluctuations may affect the value of an investment and any income derived from it.
Fund investors exercising any right to redeem units/shares of any fund may not get back the amount initially invested if the unit or share price has fallen since the initial investment. Deductions for charges and expenses, particularly the initial charge (if any), are not made uniformly throughout the life of the investment, so fund investors redeeming out of the fund during the early years may not get back the amount invested.
There can be no guarantee that the tax position or proposed tax position prevailing at the time of an investment will not change. Dividends and capital gains on securities may be subject to withholding taxes imposed by the countries in which the investments are held.
Fund investors must read the most recent applicable offering documents (including any relevant supplements) for a summary of the risk factors pertaining to the investment. Please note, however, that no summary of risk factors is exhaustive, and there may be other risks that could affect your investment.
The information provided on this website is not intended for distribution to, or use by, any person or entity in the United States, or in any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject any of the funds described herein, SSGA (including its affiliates) or any of their products or services to any registration, licensing or other authorisation requirement within such jurisdiction or country. Nothing on this website shall be considered a solicitation to buy or sell a security, product or service (including advisory service) to any person.
HYPERLINKS
SSGA does not recommend or endorse and accepts no responsibility for the content of any website not operated by SSGA which you may visit by following a link from this website. You acknowledge and agree that neither SSGA nor any of its affiliates is responsible for the availability of such third-party websites or resources, does not endorse, approve, investigate or verify, and is not responsible or liable for any content, advertising, products, or other materials on or available from such websites or resources. You further agree that neither SSGA nor any of its affiliates shall not be responsible or liable, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with use of or reliance on any such content, products or services available on such external websites or resources. These links are provided as a convenience and solely for informational purposes. SSGA is not making any recommendation to invest in, purchase, or sell any securities or other products or services offered on the linked websites, nor has SSGA sought to verify or confirm the information contained in the linked websites. Accordingly, SSGA disclaims any responsibility for the linked websites.
No other website, without the prior written permission of SSGA, is authorized to link to any part of this website.
COOKIES
SSGA uses cookies for collecting user information from certain pages of this website. A cookie is a file that is stored on the hard disk of a computer by the web browser on a computer. It contains information sent by the website that a user has visited. A cookie identifies users and can store information about them and their use of a website. SSGA uses cookies to keep track of user activity, which allows SSGA to identify which areas of the website are more interesting to the users so that improvements can be made to this website.
SSGA expressly reserves the right to monitor any use of this website.
I confirm that I have read and accept the Terms and Conditions of using this website and that I am based in Austria and am (or am acting on behalf of) a professional investor.