'A new phase of growth' for emerging markets

Emerging markets have typically been associated with the rise of a global middle class, driven by younger populations and increasing per capita incomes.

Emerging market investments have been far from out of favour over the last decade but Tyler Mordy, CEO and CIO at Forstrong, believes these markets are now at a turning point and entering a new phase of growth. This growth is what he coins the “EM Boom 2.0." Mordy argues the new boom is significantly different from the earlier phase, marked by China's rapid industrialization, which spanned from 2002 to 2011.

He provides two macroeconomic frames to understand the evolution and current state of emerging markets. The first frame is historical, focusing on the previous boom led by China's entry into the World Trade Organization in 2001, which plugged 500 million new workers into the global labour pool. This period saw a surge in trade, cross-border capital flows, and economic growth centered around China, often encapsulated by the popular acronym "BRICS" (Brazil, Russia, India, China and South Africa). This new emerging market phase extends far beyond China with far deeper participation.

The second frame focuses on the current global context, which Mordy describes as a "global race to re-industrialize." This race is driven by factors such as decarbonization, re-globalization, and re-militarization, reversing the trends of secular stagnation that characterized the 2010s. “Emerging markets, particularly those excess labour and commodity exporting capabilities, are now positioned for long-term outperformance,” Mordy says.

EM Boom 2.0: Beyond China

While China's industrialization was the focal point of the first EM boom, the current phase encompasses a broader range of emerging market nations. India stands out as the centrepiece of this new cycle. Mordy highlights India’s ongoing infrastructure boom, in particular, which includes significant investments in roads, bridges, and trains.

"It's now deep into a major CapEx boom,” he says. “We can see that through a steep rise in gross capital formation and surging private sector new project announcements.” He added that the country is well-positioned due to its young, English-speaking population, a banking system inherited from British rule, and a diverse economy capable of moving up the value-add manufacturing chain.

Other emerging markets, such as Brazil, Chile, and South Africa, are benefiting from the global push for decarbonization, which has increased demand for raw materials. Additionally, countries like Vietnam, Indonesia, and Mexico are capitalizing on supply chain diversification, as companies seek alternatives to China. Mordy also points to the Gulf states, which are leveraging their strategic location and resources to diversify their economies away from fossil fuels.

“It shouldn't be difficult to see what's happening here. Increased infrastructure, investment and trade is integrating more of the world's developing economies into the global economy,” Mordy asserts. “Excluding China, these countries are more than 3 billion people where demographics are favourable, incomes are growing and constructive dialogues are leading to a surge in cross border commerce and economic partnerships. There are simply more people participating in the growth this time.”

A Changing Global Landscape

Mordy emphasizes that the current emerging markets boom is fundamentally different from its predecessor. Unlike the previous boom, which was largely deflationary due to the influx of cheap Chinese goods, the new boom is likely to have an inflationary impact due to the sheer scale of economic activity and investment across multiple regions.

“China’s boom in the 2000s was a huge deflationary force on the world,” he says. “This one is not as deflationary. In fact, it is more inflationary because there’s so much trade and new economic activity happening around the world. There’s just an enormous amount of public and private money flooding into capital projects of all kinds that is creating an investment boom in all corners of the world and a revival in aggregate demand.”

Another significant trend is the formation of a “parallel economic ecosystem” outside of the U.S. In the past, capital generated from trade often flowed back into the U.S. economy. Now, money is heading back into domestic markets, funding entrepreneurial dynamism across emerging markets. “We're seeing capital moving in a different way and that's important because the foundation of economic growth is productivity. Higher investment into domestic economies means higher productivity,” Mordy noted.

The resilience of emerging markets during recent economic challenges has surprised many investors. Mordy explains that most emerging market economies entered the pandemic with stronger financial discipline and lower levels of borrowing compared to Western nations. As a result, they emerged post-pandemic with improved fiscal positions, stronger balance sheets, and lower external vulnerabilities.

One of the key factors supporting emerging markets is their relatively low currency valuations, which Mordy describes as a "cheat code" for national economies. "Low currency valuations have always been a great starting point for emerging market outperformance. They currently have heightened competitiveness through lower currencies, which attracts capital, and higher growth follows. You get this virtuous cycle going forward," he explains.

Looking ahead, Mordy believes that emerging markets are on the cusp of a significant growth cycle, driven by structural factors such as favourable demographics, increasing incomes, and deepening economic integration. He notes that while these markets have been under performed and under-loved for the past decade, they are now beginning to attract attention from global investors.

"We're in the very early stages of emerging markets becoming acceptable as an asset class again and, for the last decade, they have not been,” Mordy asserts. “The setup for emerging market outperformance is the best we have had in decades.”