Morgan Stanley IM: Emerging Markets – Stepping Into the Spotlight

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In the 2010s, emerging market (EM) equities suffered their worst performance as an asset class since the 1930s (Display 1).¹ They returned a mere +49%, compared to an average of +203% in the previous seven decades.2 Emerging market countries ran high twin deficits, which led to currency depreciation and forced a cleanup of excesses from their precarious balance sheets, a legacy of loose fiscal and monetary policies. An important factor inhibiting EM equity performance in the last decade was the deterioration in the growth differential between emerging economies and the developed world, the key driver historically of relative returns of the asset class. After lagging the developed economies (DM), especially U.S. equities, for more than a decade, emerging markets are in a much stronger position to outperform developed countries this decade.

Display 1

2010s: Worst Decadal Returns for EM Since the 1930s

Emerging Markets Cumulative Total Returns Each Decade

^{Data as of December 31, 2019.
Source: MSIM, Bloomberg, Factset, Haver. Equity Total Returns, USD.}

Despite global crises like the COVID pandemic and Russia’s invasion of Ukraine, as well as monetary policy tightening by the Fed and the continued strength of the U.S. dollar (USD), several emerging markets have thrived. Brazil, Mexico, India, Indonesia and the GCC (Gulf Cooperation Council) have not only outperformed the MSCI EM index but even the U.S. so far in 2022.³ In fact 9 of the 10 top performing markets this year are emerging countries. The headwinds of the past are becoming tailwinds in several markets, with the exception of China, that we believe should provide support for many years to come. Various factors contributing to this outperformance should continue to serve as catalysts for a broader EM rally:

^{RISK CONSIDERATIONS}

^{There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than the risks generally associated with investments in foreign developed countries. Stocks of small-capitalization companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the Portfolio’s performance. Illiquid securities may be more difficult to sell and value than public traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. Cryptocurrency (notably, Bitcoin) operates as a decentralized, peer-to-peer financial exchange and value storage that is used like money. It is not backed by any government. Federal, state or foreign governments may restrict the use and exchange of cryptocurrency. Cryptocurrency may experience very high volatility. ESG Strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.}

¹ MSIM, Bloomberg, FactSet, Haver
² MSIM, Bloomberg, FactSet, Haver. EM returns based on the MSCI EM Index.
³ MSIM, Bloomberg. As of Dec 11, 2022. U.S. returns based on the S&P 500® Index.