Preview
Back in the 80s, an American fast food chain made the memorable slogan, “Where’s the beef?” to imply that its competitors were not providing enough substance – in this case - beef! In this update on the Emerging Markets (EM) we take some time to lay out why we believe EM is a compelling asset class story. The question we get most often is “what’s the catalyst that’s going to drive EM forward?”
In this case, we’d like to use this easy to remember analogy and highlight “the beef” for the asset class-earnings growth. As fundamental, stock-driven investors, this is a core lens through which we look at investments in our fund.
What’s also interesting about EM earnings is how critical it is for driving asset class performance throughout longer-term cycles. When we look at EM’s performance versus Developed Markets (DM) over the long term, we see that relative earnings growth is a major driver of EM’s outperformance.
For example, the 35-year earnings per share (EPS) compound annual growth rate (CAGR) for the US has been 6.4%1. What we’ve observed historically is that during strong outperformance periods for EM equities, the earnings growth is double-digit (strong on both an absolute and relative basis).
Fortunately, we are right at a key turning point and the case for EM earnings outpacing DM is strong, in our view. It’s driven by higher growth rates (GDP) and less margin pressure as inflationary forces abate. Furthermore, for technology companies in EM, it’s also supported by strong market positioning and structural growth drivers such as artificial intelligence (AI).
WHAT ARE THE RISKS?
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.