Watching and listening to the various investment analysts, traders, and portfolio managers that have appeared on Bloomberg Television over the last week or so, there is a common theme in their outlooks for 2020. Many of these experts have expressed their opinion that they see emerging markets outpacing developed markets in the coming year. Because I haven’t been keeping a scorecard, I can’t give you an exact number, but I can tell you they have been numerous.
While emerging markets did lag the S&P and other developed markets in 2019, it hasn’t been that long ago that emerging markets led the way. The chart below shows how the S&P 500 SPDR (NYSE: SPY) outpaced emerging markets as well as developed markets as a whole in 2019. I used the iShares MSCI Emerging Markets ETF (NYSE: EEM) as a proxy for emerging markets and the Vanguard FTSE Developed Markets ETF (NYSE: VEA) as a proxy for all developed markets.
What we see is that the S&P gained almost 31%, at least through the close on December 30, while developed markets gained 22% and emerging markets gained 18%. In 2018, the S&P was down 4.6% while developed markets and emerging markets were both down approximately 15%. Two years ago (2017) was a different story with emerging markets gaining over 37% while developed markets gained 26.4% and the S&P gained 21.7%.
There are two things that bother me about the bullish outlook for emerging markets. First, any time I see a majority of investment professionals arriving at the same conclusion, it almost automatically causes a red flag to go up for me. It is rare for group-like thinking to be accurate when it comes to asset classes. Part of the reasoning is that if these experts are sharing this information now, they have likely already made changes to the portfolios. If they have already made the changes, some of the buying pressure that can move emerging markets higher has already been spent.
The second concern I have about the theory that emerging markets will outpace developed markets revolves around global economic growth. Historically, when emerging markets have led other markets, it has been when global economic growth has been increasing. If we look back to years like 2011 and 2015, overall global GDP was growing at a slower pace than the previous year. In those years emerging markets lagged developed markets by a wide margin. In 2015, the S&P and developed markets were essentially flat while emerging markets fell over 16%. I am using the same three ETFs that I used in the 2019 chart above.
In 2011, the S&P gained just under 2%, developed markets fell 12.3%, and emerging markets fell 18.8%.
According to data from the World Bank, the overall global GDP was growing at a pace of 3.13% heading into 2011 and it was growing by 2.5% heading into 2012. Heading into 2015, global GDP was growing at a rate of 2.8% and, at the end of the year, the rate was 2.48%.
In the meantime, global GDP grew at a much faster pace in 2009 as the global economy moved out of a contraction into an expansion phase. In 2016 and 2017, global GDP growth moved up to a rate near 3% from 2.48% in 2015. Emerging markets outperformed developed markets in 2009, 2016, and 2017.
What this suggests to me is that if emerging markets are going to outpace developed markets, the global GDP growth rate is going to have to improve in 2020 compared to where it is now. The current rate is right at 3%.
Given the current economic environment around the globe, I don’t think we see a huge uptick in global GDP in the coming year. At least not the kind of uptick we have seen when emerging markets have led the way in the past.
I may end up being wrong and the investment experts that have appeared on Bloomberg may end up being right, but I am taking a more cautious approach to 2020.