Is It Time To Consider Emerging Markets?

Emerging markets (EM) have been a letdown over the past decade, with a strong dollar, weak commodity prices, and sluggish corporate growth dragging down returns compared to developed markets. But things might be turning around soon, thanks to some favorable macro trends. 

Below, we’ll break down two key catalysts that could spark a bullish run in EM stocks — one that's more immediate and another signaling a longer-term shift.

MSCI EM vs S&P 500 vs STOXX Euro 600 (Last 10 Years)

Here’s why investors are taking notice

Depending on the Fed’s pace in rate cuts, we could see a weaker US dollar as lower yields make US assets less appealing, boosting the value of international investments and easing the strain of dollar-denominated debt for emerging markets. Historically, EM stocks tend to shine when the dollar softens, as shown in the chart below. 

Inverse Relationship Between MSCI EM Performance and USD

Recent Commodity Futures Trading Commission data shows hedge funds and other speculators have flipped their dollar bets to net short, with $8.83 billion in bearish positions as of the end of August — a stark reversal from a net long position of $32.6 billion back in May. “Powell’s recent dovish tone hints at more rate cuts than initially expected,” said Aaron Hurd, senior portfolio manager of currency at State Street Global Advisors, who recently dialed back his bullish bets on the dollar.

A demographic divide

Demographics are becoming a major economic force, splitting the world into two camps: aging countries and countries with youthful, growing populations. Many developed nations are aging fast, as longer lifespans and declining birth rates create a shift. In fact, by 2024, the US is expected to have 18% of the population aged 65 or older, compared to 11% 50 years ago.

This trend is mirrored in parts of Europe and Asia, where aging populations are shrinking workforces and straining government budgets due to higher healthcare demands. The ripple effect? Slower global growth, stubborn inflation, and ballooning deficits.

It’s a different story in certain emerging markets. While China is also aging, countries like Mexico and India boast younger populations and expanding workforces. These growing working-age groups could fuel stronger economic growth, rising consumption, and a brighter outlook for these economies.

India and Mexico’s Youth Advantage Over the US 

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