Investors who've reaped stellar returns in U.S. and European stock markets over the past three decades may need to shift their strategy Eastward if they aim to achieve comparable results over the coming decade.
Strong business conditions in the West have driven remarkable performance and generated tremendous wealth for equity investors, with overall returns since the mid-1980s outpacing historical averages. That pattern is likely to moderate in the coming years, however, as the factors that have fueled that growth wane.
On the other hand, global economic and demographic changes make emerging markets — and Asian markets in particular — fertile ground for robust expansion and stock performance in the foreseeable future.
Depending on your investment needs, risk appetite and time horizon, we see an opportunity for emerging Asian markets to be part of an overall diversified portfolio for many investors.
First, remember the importance of taking a long-term view. Understanding economic, demographic and industry trends can help you choose investments that take advantage of market dynamics and deliver healthy returns over an extended time horizon.
Prudent asset allocation — a strategy that seeks to curb risk and reach targeted returns by diversifying your capital among different investment types, such as stocks, bonds and cash — is key to developing a strong and resilient portfolio.
What investors may not realize is that geographic diversity is nearly as important.
For the past few decades, beneficial economic conditions and rising corporate profits fueled gains in stocks tied to advanced economies in the West, which outperformed already healthy longer-term trends. U.S. equities, for example, averaged roughly 8 percent total annual returns from 1987 to 2017, compared with around 6.5 percent average annual gains from 1917 to 2017, according to historical annual returns.
As labor forces age and productivity growth slows in the West, that golden era is unlikely to endure, given the link between stock market returns and national economic expansion.
We've seen this dynamic at play in recent years in Europe, which has experienced muted stock performance and slower economic growth than the U. S.
Our emphasis on domestic stocks over the past five years has proven to be lucrative for City National Rochdale clients. However, global trends toward slower growth in advanced economies are expected to dampen returns in the U.S. market in the coming years.
Against this backdrop, we're looking to emerging markets in Asia as the source for strong investor opportunities in the future.
Government economists estimate long-term U.S. economic growth at 1.8 percent, a notable decline from the more than 3 percent growth rate the country experienced in 2000. Similar changes are forecast for advanced economies more broadly.
Emerging markets, in contrast, are poised to benefit from more favorable trends. And Asian emerging markets in particular — a group that includes China, Taiwan, India, Pakistan, Indonesia, Korea, Malaysia, the Philippines and Thailand — should offer investors superior long-term value overall.
While the International Monetary Fund recently projected that growth in emerging markets overall will slow to a 5.2 percent annual rate by 2027 from 6.5 percent in 2018 — that growth level nonetheless far outpaces anticipated gains in advanced economies.
Every emerging market is different, and Asia is projected to significantly surpass its peers in the long term, despite recent pressures tied partly to the U.S.-China trade war.
While growth is softening gradually, emerging and developing Asia "remains the main engine of the world economy," the IMF noted in October.
The organization forecasts Asian emerging markets will grow by roughly 6 percent next year, compared with 4.6 percent for emerging and developing economies overall and 1.7 percent for advanced economies. And they're expected to maintain that 6 percent growth rate over the medium term, with growth in India alone forecast to exceed 7 percent annually.
In keeping with that outlook, we expect emerging Asia's contribution to global economic growth to expand over the next decade, with the likes of China, India, Vietnam and Indonesia enjoying high growth on their own and compared to advanced economies and emerging markets in other regions.
Several factors are driving this Asian expansion, and they fall in line with City National Rochdale's "four Ps" we look for in analyzing markets — policies, population, potential and profitability.
We see Asia as offering superior investing prospects in these four areas compared with other emerging-market regions.
Among their advantages, emerging Asian markets enjoy rising income levels, high saving and investment rates, low debt, and demographic benefits from a younger workforce. The region's prominent place in the so-called global value chain — product design, manufacturing and distribution activities spread among countries around the world — also plays a key role.
A young, surging middle class should accelerate consumer spending in the region. The IMF expects Asia's middle class to reach nearly 3.5 billion people in 2030, compared with close to 1.4 billion in 2015 and 525 million in 2009. This expansion is forecast to significantly eclipse that of most other regions.
While the swelling middle class powers consumer demand within emerging Asian markets, these nations also should see rising external demand as they strengthen ties with other Asian countries, Europe and the Middle East.
Asian nations are reshaping themselves, transitioning from agriculture and low-cost, export-focused factory labor to more sophisticated economies with better-paying jobs in service industries and high-value manufacturing. Technological innovation, strong investment, heightened competition and new, business-friendly government policies all contribute to the expansion.
Rising incomes and productivity associated with these trends should support higher corporate earnings and equity returns.
Even with these strong tailwinds, we see significant room for emerging Asian markets to become even more competitive, and therefore count stocks tied to these countries among the best long-term investment values globally, with financial, technology and consumer discretionary companies leading the boom.
Meanwhile, although Asia offers strong growth prospects, equities in its emerging markets trade at significant discounts compared to stocks in advanced countries — as much as 30 percent.
These equities so far remain underrepresented in global index funds, especially given the region's economic importance.
Emerging markets in general currently represent less than 20 percent of global equity investments, a percentage that we estimate will rise sharply by 2030.
If you're an investor with a long time horizon, stocks in emerging Asian markets offer a prime opportunity to benefit financially from the region's projected growth. At the same time, adding these equities to your portfolio may lower your risk by providing greater diversification.
That's not to say that investing in emerging markets carries no risk, especially from short-term market swings. Research indicates, however, that Asian market investments provide long-term benefits in diversifying portfolios.
Our team at City National can help you make sense of emerging markets and confidently choose an investing strategy tailored to your goals and needs. Get in touch to see how emerging Asian markets can play a beneficial role in your portfolio.
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