Global Equity Outlook

Early innings for emerging markets

Nov 6, 2017

The outperformance of emerging market (EM) stocks in 2017 has investors asking: Is this a game of catch-up or the start of a multi-year winning streak? We lean toward the latter and see the EM equity revival in early innings.

Equity highlights

  • The underlying fundamentals for EM equities are improving after five years of declining profitability and weak earnings growth. We believe the recent outperformance is the start of a longer trend and assign the asset class an overweight position.
  • Reform progress is central to EM economies and markets reaching their full potential. EM reform is not new, but we are encouraged by a few countries making big headway — with positive implications for equity markets and future earnings.
  • The spotlight has focused on EM Asia, led by powerhouse China. But all three major EM regions are contributing to robust earnings growth for the asset class. Our favored markets include India, Indonesia, Brazil and Argentina.

Snapshot

EMs are important to the global economy, representing a 35% share in current dollars and 60% based on purchasing power parity, according to IMF estimates. Their presence in global equity indexes is far smaller, at 12% of the MSCI All-Country World Index currently. And many investor portfolios fall well below that: BlackRock analysis of U.S. advisor allocations shows total portfolio exposure to EM equities at just 3.5% as of September. But investors seem to be warming up. Net flows into EM equity funds are on track to reach $70 billion this year, or about 6% of assets under management (AUM), as illustrated in the Only just begun chart below. This is a solid reversal from the $114 billion in outflows over the last four years (amounting to 14% of AUM). And yet fund flows and price momentum are not signaling mania, research from BlackRock’s Risk and Quantitative Analysis team shows.

Chart: Flows into EM equity funds, 2007-2017
Kate Moore
Chief Equity Strategist
Kate Moore, Managing Director, is Chief Equity Strategist for BlackRock and is a member of the BlackRock Investment Institute (BII). She is responsible for ...