As has happened in the past, whenever US markets have outperformed by a significant margin, it has always been at the expense of emerging markets. The last decade was no exception. In the same breath, the reverse was also true. That is, whenever US markets struggled with sub-par returns, those decades belonged to emerging markets. Are you in a turn now for emerging markets? Let us find out.
To make the case for emerging markets, let’s first look at some key historical data points in terms of how the US and EMs have done in the last decade. For the United States, the last decade has been stellar in terms of earnings. S&P delivered an annual return of more than 16.6% (14.2% excluding dividends) in this period. On the other hand, emerging markets, as measured by the MSCI EM index, returned a meager 3% (without dividends) annualized over the same period. There was a sharp difference that made them two different worlds at each end of the spectrum in the investment universe. More interesting data emerges if one breaks down S&P’s earnings data in terms of contributions from sales growth, margin expansion and earnings multiple.
According to a study done by Christopher Bloomstran in his recent annual letter (as brilliantly captured by Akash Prakash, Amansa Capital, in his latest piece), the overall return of 16.6% is made up of sales growth of 3.8%, margin expansion of 4%, 6.4% multiple expansion and finally 2.4% of the dividend yield. The study argues that, looking ahead to the next decade, even assuming that sales growth continues at the 3% level, it is less likely that any gains will come from expanding the margin or earnings multiple, considering that they are at more than the highest level. cyclically adjusted basis. Adding another 2% growth from the dividend yield, projects a bleak outlook for the S&P’s annualized yield of close to 5%. If one continues, as a corollary, this will also mean that emerging markets will shine with greater performance in the next decade. This assumption is supported by the historical data points.
In India, apart from this expected turn in favor of EMs, something that will make the medium/long term bull case more compelling are the huge tailwinds from the larger trends taking place globally.
According to a recent Morgan Stanley research note, larger global trends such as
Digitization they are likely to disproportionately benefit India compared to any other country. It is difficult to find any other country that will get a boost from all these trends. While China+1 and Europe+1 are central to deglobalization, India’s push into green energy and hydrogen initiatives is likely to fuel the resurgence of private capex cycle. In digitization, although it covers a large scope and a large spectrum, if one specifically limits the attention to the potential of delocalization on India becoming an office for the world, the prospects look extremely bright, especially with the trend of work from anywhere that gathers traction around global corporations. All factors will evolve over time.
In addition, India’s macro is also likely to gain momentum from the other cyclical trends listed below.
- Low cumulative base effect of slow growth for many years.
- Turn the property cycle with a multiplier effect on the economy.
- Revival in Demand for Private Investment.
- The credit cycle turns in India on the back of cleaning up bank and corporate balance sheets.
Going by market actions in EMs and India in particular during this down cycle, it appears that global investors are positioning themselves for leadership from these market segments in -next upcycle. In the markets, if a sector falls much less in a downturn or if a sector shows a lot of resilience in a falling market, then such sectors lead into the coming bull market. If one extends the same logic to the EM basket or to specific markets within EM, going by India’s convincing performance in the current down cycle, it will not be surprising if India leads the next bull cycle within the emerging market basket that in all probability will out-shine markets such as the United States where earnings are likely to sub-par in the next decade, as argued in – the opening section of this article. It’s time for EMs to carry the baton!
(Author is ArunaGiri N, Founder CEO & Fund Manager of TrustLine Holdings)
(Disclaimer: Recommendations, suggestions, views and opinions given by experts are their own. These do not represent the views of Economic Times)