Emerging Markets 2025

Outlook 2023

In light of the widespread decline in equity markets during 2022, emerging market equities are believed to be one of the most undervalued asset classes, offering attractive valuations compared to historical norms. Just have a look at some metrics such as the Price Earnings Ratio and it is one of the most attractive ones in recent years.

When it comes to bonds, the outlook for emerging market debt, which faced a difficult landscape in 2022, is now considered to be more positive. The combination of high yields, favorable valuations, and a supportive global environment, including the potential for growth in China, creates the opportunity for equity-like returns in the mid-teens over the next year in both hard and local currency debt.

What happened recently?

But before we start, what happened when back in 2020, we expected emerging markets such as China to be the clear winners of the COVID pandemic?

In 2022, the MSCI EM Index experienced a decline of around 20%. When all the spotlights were on China, they heavily disappointed last year. Other BRIC countries such as Russia did not help either. Korea – although just considered as Emerging for the MSCI index and not in the FTSE index -

This focus on innovation and growth trends can have a significant impact on investment performance. In 2021, the MSCI EM ex-China Index outperformed the MSCI China Index by a margin of 32 percentage points, showcasing the benefits of actively targeting emerging market equities. Regions such as Argentina, India, or Turkey had something to do with this performance.

However, as said, we have seen some signs of improvements in the last weeks. In the last quarter of the year, the asset class saw a resurgence, rising by nearly 10% as a result of China’s efforts to reopen its economy and support for the real estate sector to reignite economic growth. In terms of sector performance, communication services performed the best, followed by health care, materials, and real estate. Furthermore, there were some indices such as the Turkish or Argentinian ones that achieved excellent results, even if their local currency devaluated even more.

Meanwhile, energy, utilities, and consumer staples lagged behind the index during the quarter. The strong recovery seen in the fourth quarter of 2022 bodes well for the future of emerging market equities in 2023. Let’s take a closer look at some of the key factors that will drive growth in the coming year.

Some Latin American countries can be the next hidden gem, considering that they have been reviled for some time

Despite facing difficulties in 2021 and 2022, such as slow vaccine distribution and the emergence of the Delta variant, there is potential for a rebound in emerging market (EM) economies. However, risks still persist. A potential catalyst for recovery could be a rise in interest rates, which is expected to bring developed-market GDP back to its trend line.

An active strategy in emerging market (EM) equities has the potential to outperform a US equity strategy in the next decade, as populations in EM countries grow and innovation continues to expand. The equity valuations in EM markets are relatively attractive, and earnings growth is currently at a decade-high. The region is home to many of the world’s top-performing companies, but these firms may not be included in standard benchmarks, which tend to heavily weight state-owned enterprises and industries that rely on exports. An active investment approach can provide investors with greater exposure to companies that are experiencing growth driven by secular trends.

Long-term vision

Emerging markets are set to play a significant role in the global economy not just until 2025, but in the next decade. Despite facing challenges such as economic instability, political unrest, and the ongoing COVID-19 pandemic, these markets have shown remarkable resilience and are poised for growth in the coming years.

One of the key drivers of growth in emerging markets is their rapidly growing populations, which provide a large pool of consumers for both local and foreign businesses.

This, combined with increasing urbanization, rising incomes, and growing middle classes, creates a favourable environment for investment.

Another factor contributing to the growth of emerging markets is technological advancements, particularly in the areas of digital infrastructure, e-commerce, and fintech. This is providing new opportunities for businesses to reach customers and drive innovation in these markets.

In 2023 and 2024, some of the top emerging markets to watch include China, India, Brazil, Russia, and South Africa. These countries offer a diverse range of investment opportunities across various industries, including technology, healthcare, and infrastructure. The astonishing returns that occurred in the Turkish and Argentinian indices are not expected to continue in 2023.

China, with its large and growing middle class, is expected to continue to drive growth in Asia, while India is poised to become a major player in the global economy, thanks to its large and youthful population. In South America, the 2 big players, Brazil and Argentina, are set to benefit from a rebound in commodities prices and increased investment in infrastructure.

Russia, meanwhile, is poised to benefit from a recovering oil market, while South Africa is expected to see growth driven by its mineral resources, including gold and platinum.

You may have a look at some of these countries in this article

Beware of the risks

However, while emerging markets offer significant opportunities, they also come with risks. Political and economic instability, currency fluctuations, and regulatory challenges are among the risks that investors must consider when investing in these markets.

Despite these challenges, emerging markets are expected to continue to play an increasingly important role in the global economy over the next two years. With the right investment strategy, they offer the potential for high returns, while also helping to diversify portfolios and mitigate risk.

In conclusion, the next years are set to be exciting years for emerging markets, with opportunities for growth and investment in a range of industries. The prices we see are very attractive as entry level.

Research and where to start

As always, careful research and a well-considered investment strategy will be key to realizing the full potential of these dynamic and rapidly growing markets. However, instead of cherry-picking stocks, the best solution for most of us would be and index in order to collect returns from all countries.

Just to give you some options, some of these index funds can include below seen here. Those with low PER have been selected:

If you want to see all Emerging Market funds and all the statistics and comparison against peers, you may visit the sections for different regions Funds per Region.

And if you are not sure which shares constituting the index, you can use the following site Index Constituents to analyze all the shares one-by-one.

Now that you have the tools, you can start your research and find the best investment for you. Good luck!