Emerging Markets: Finding Growth Outside the U.S.

With U.S. equity valuations near record highs and domestic growth moderating, investors are turning to emerging markets (EM) for both diversification and higher returns. EMs now account for roughly 27% of global equity market capitalization—and Goldman Sachs projects this share will climb to 35% by 2030 and nearly 50% by 2050. This trend reflects faster GDP growth, expanding middle classes and underpenetrated consumer markets beyond the United States.

1. EM’s Rising Share of Global Asset Markets

Emerging economies are not just a niche allocation—they’re becoming core drivers of global capital markets. According to Goldman Sachs, EM market capitalization could overtake the U.S. by the end of this decade, rising from 27% today to 35% in 2030 and 47% by mid-century. Faster income convergence and supportive demographics underpin this shift, as per-capita GDP in EMs continues to catch up with developed peers.

2. Global Growth Spillovers from EM Expansion

The International Monetary Fund finds that large emerging economies now generate economic spillovers comparable in size to those from the U.S., and that a growth acceleration in these markets could lift global GDP by up to half a percentage point per year. China remains the largest source of spillovers, but India, Brazil, Russia and Mexico also play pivotal roles in driving regional and global demand.

3. Key Drivers of Emerging Market Growth

Several structural factors power EM outperformance:

• Export Momentum: As U.S. tariffs bite and the dollar fluctuates, many EM exporters saw early-year surges in shipments—buyers stockpiling ahead of tariff windows—boosting near-term trade volumes.
• Resource Endowments: Nations rich in lithium, rare earths and agricultural commodities benefit from global decarbonization and food-security trends, turning critical inputs into growth engines.
• Urbanization & Consumption: Rapid migration to cities and a surging middle class boost demand for housing, autos and digital services. Between 2020 and 2035, the EM middle class is set to grow by over one billion people.

4. Thematic Opportunities and Case Illustrations

Let me show you some examples that illustrate how EM themes translate into investment ideas:

• India’s Digital Leap: With smartphone penetration rising from 30% to 70% in the last five years, homegrown fintech platforms such as Paytm and PhonePe are expanding financial access to hundreds of millions.
• China’s EV Revolution: Electric-vehicle sales in China surged over 60% in 2024, led by local champions like BYD and NIO, as government subsidies and urban emission targets accelerate adoption.
• Brazilian Agribusiness: Brazil’s soy and beef exporters are capturing global market share amid supply-chain shifts, with agricultural exports rising 18% in the past two years.

5. Risks and Mitigation Strategies

Investing in EMs comes with heightened risks that require active management:

• Political & Regulatory Volatility: Sudden policy changes—currency controls, tax revisions or trade disputes—can create sharp equity and currency swings.
• Currency Fluctuations: EM currencies can depreciate 10–20% in a single quarter during stress; currency-hedged strategies may help stabilize returns.
• Infrastructure Gaps: Underdeveloped logistics and power shortages in some regions can constrain corporate earnings, demanding country-level due diligence.

Mitigation tools include diversifying across multiple EM regions, using currency hedges selectively and combining equity exposure with local-bond holdings to dampen volatility.

6. How to Access Emerging Market Growth

Here’s a simple framework for building an EM allocation:

1. Set Clear Objectives: Define whether you seek long-term capital appreciation, income from local bonds or both.
2. Choose the Right Vehicles: Broad EM equity ETFs (e.g., MSCI Emerging Markets), active EM funds with country-conviction tilts and local-currency bond ETFs offer different risk-reward profiles.
3. Diversify Within EM: Blend large EMs (China, India) with smaller, high-growth markets (Vietnam, Indonesia) to capture idiosyncratic opportunities.
4. Manage Currency Exposure: Decide between unhedged portfolios—benefiting from weaker dollar tailwinds—or hedged strategies to limit FX drawdowns.
5. Monitor Macro Signals: Track PMI data, inflation trends and central bank cycles in key EMs to adjust exposures as growth and policy regimes shift.

Conclusion

Emerging markets are poised to account for an ever-larger share of global growth and asset returns. While higher volatility and policy risks require vigilant risk management, the structural forces of demographics, industrialization and digital adoption create a compelling case for EM allocations. By combining thematic insights, diversified vehicle selection and disciplined currency management, investors can harness growth opportunities outside the U.S. while navigating the complexities of developing economies.