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U.S. vs. Emerging Markets Equities Insights

By Richard "Crit" Thomas, CFA, CAIA
International Equities
bridge to city cargo ship

Emerging Markets vs. U.S.

We believe equity investors should consider Emerging Market stock exposure due to the following more secular qualities:

  • Diversification: portfolios that included Emerging Market stocks have historically produced higher risk-adjusted returns (Bouslama and Ouda).
  • Relative Economic Growth: Emerging Markets are expected to account for 70% of global economic growth through 2025 with middle class spending growth being the main driver (McKinsey & Co).
  • Growing Middle Class: by 2025 Emerging Market consumption will represent approximately half of global consumption (McKinsey & Co).
  • Equity Market Expansion: Emerging Market equities represent only 12% of global equity market capitalization
    (Source: MSCI), yet their economies represent approximately 41% of global GDP (Source: International Monetary Fund).

But why now…?

Conclusion: Last quarter, we moved to an underweight for EM exposure due to concerns surrounding U.S. monetary policy tightening taking liquidity out of the marketplace and concerns about China’s growth potential amid property sector difficulties and zero-tolerance COVID policy. In March, China indicated it would be adding economic stimulus, though this positive is offset by the Russian invasion of Ukraine, which will likely have a negative impact on resource-poor countries.


  • Emerging Markets have historically experienced significant price swings, creating large valuation peaks and valleys. Currently, the MSCI Emerging Markets Index looks attractive relative to the S&P 500® Index. Relative valuations slipped a bit over the last quarter. Valuations improved for both Indexes as prices fell, while at the margin, the underlying fundamentals for the S&P 500® Index held up better than the MSCI Emerging Markets Index. On a price-to-trailing-10-year-earnings basis, which smooths earnings cycles, the MSCI Emerging Markets Index traded at 16x versus 35x for the S&P 500® Index (as of February 28, 2022). However, the MSCI Emerging Markets Index is still not that cheap relative to its own history.
  • The previous valuation lows occurred during the Asian Financial Crisis. Since that crisis, corrective action has taken place across many Emerging Markets countries in both the public and private sectors. These actions included stronger regulations, fiscal policy, and capital controls. These measures helped prevent a major Emerging Markets crisis from forming during the downturn.

Relative Valuation Measures
Based on the MSCI Emerging Markets Index/S&P 500® Index as of February 2022

RANK 1-5*
Price/Cash Flow 2
Price/Sales 1
Price/Trailing 10 Year EPS 1
Forward P/E 2
Summary Signal (Average) 1.6

 Relative Valuation*Average of the five relative valuation measures.

Sources: Bloomberg, MSCI

Relative Earnings Prospects

  • Relative price performance and relative earnings growth have historically followed similar paths. S&P 500® Index earnings have been outpacing MSCI Emerging Markets Index earnings since 2008, helping explain S&P 500® Index outperformance. Though, compositional changes to the Index explain much of this underperformance (not fundamentals), and they are unlikely to be repeated.
  • While S&P 500® Index earnings estimates have continued to move up, Emerging Markets earnings estimates have not. It is hard to generalize as there are many cross currents, for example, historically higher commodity prices helped Emerging Markets, but Index exposure to these sectors has shrunk considerably. China’s clampdown on the property sector has dimmed its growth prospects and casts doubt on its official 5.5% GDP growth target in 2022 without more stimulus. And that is the key; should China announce a significant increase in stimulus, we may reconsider our underweight.

    Relative Earnings

Sources: Bloomberg, Bloomberg Consensus Estimates, MSCI

Trend in Emerging Markets Currency

  • The MSCI Emerging Markets Index is quoted in U.S. Dollars (USD). As such currency shifts between the USD and Emerging Markets currencies will impact returns directly. Secondarily, Emerging Markets economies can be negatively influenced when the USD rises due to the higher interest burden on debt issued in USD. That said, a freely floating currency may act as a steam valve that over time self regulates the economic impact. The degree of economic impact differs by country and is mostly dependent upon how much debt is issued in USD and the importance of external trade with other countries.
  • While the USD has moved higher relative to developed country currencies, it has remained flat versus Emerging Markets. This is despite more hawkish signals from the Fed and the war in Ukraine. Strength in some Asian currencies has offset weakness seen in central European and Latin American currencies.

*Normalization adjusts or rescales the values of different time series to a notionally common scale to allow for comparability.
Source: MSCI

Emerging Markets Perspective

Emerging Markets equities are under represented in a global context given their relative size by other measures.

Sources: *International Monetary Fund (IMF) (2017), **MSCI (February 2022)

Emerging Markets Perspective

One of the biggest growth opportunities for Emerging Markets relates to the smartphone. It is not the smartphone itself, but all the applications and industries that come along with it. Just think about when the automobile became ubiquitous and all the industries it created that didn’t exist prior—from highways to gas stations, fast food chains, housing (suburbs), billboards, motels, and many other businesses not directly associated with making cars. The smartphone is having a similar impact and it remains an underpenetrated market in Emerging Markets. This is just getting started. The following chart creates perspective on not just the penetration, but also the sheer size of the Emerging Markets. Another factor to consider when looking at this chart is that a user is not an owner. It is not unusual for a whole family in an emerging market to share one smartphone, but each family member will still be counted as a separate user. As such, these rates likely overstate the true level of market penetration.

Sources: World Bank, DataReportal, VentureBeat, Juniper Research, SPMP Research, Pew Research

Glossary of Investment Terms and Index Definitions

Ons Bouslama, Olfa Ben Ouda, International Portfolio Diversification Benefits: The Relevance of Emerging Markets, International Journal of Economics and Finance, 2014. McKinsey & Company, Winning the $30 trillion Decathlon – Going for gold in emerging markets, 2012.

This commentary is for informational purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security. There is no guarantee that the information is complete or timely. Past performance is no guarantee of future results. Investing in an index is not possible. Investing involves risk, including the possible loss of principal and fluctuation of value. Please visit touchstoneinvestments.com for performance information current to the most recent month-end.

Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.

Touchstone Funds are distributed by Touchstone Securities, Inc.*
*A registered broker-dealer and member FINRA/SIPC.

Not FDIC Insured | No Bank Guarantee | May Lose Value

crit thomas global market strategist

Richard "Crit" Thomas, CFA, CAIA

Global Market Strategist
Crit is responsible for examining and evaluating economic conditions, generating insights and providing a sharpened perspective on investment strategies for enriched portfolio construction.

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