‘A new phase of growth’ for emerging markets

Emerging markets have traditionally been associated with the rise of a global middle class, driven by younger populations and higher per capita incomes. However, investment in emerging markets has been severely out of favour over the past decade.

But Tyler Mordy, Forstrong’s CEO and CIO, believes these markets are now at a tipping point and entering a new phase of growth, which he calls the “emerging markets 2.0 boom.” Mordy argues that the new boom is significantly different from the previous phase, marked by China’s rapid industrialization, which spanned from 2002 to 2011.

The author offers two macroeconomic frameworks for understanding the evolution and current state of emerging markets. The first is historical, focusing on the earlier boom, led by China’s entry into the World Trade Organization in 2001, which added 500 million new workers to the global workforce. That period saw a surge in trade, cross-border capital flows, and China-centered economic growth, often encapsulated by the popular acronym “BRICS” (Brazil, Russia, India, China, and South Africa). This new phase of emerging markets extends far beyond China and has a much deeper stake.

The second box focuses on the current global context, which Mordy describes as a “global race for reindustrialization.” This race is driven by factors such as decarbonization, reglobalization and remilitarization, which are reversing the trends of secular stagnation that characterized the 2010s. “Emerging markets, particularly those with excess labor and commodity export capacity, are now positioned to outperform over the long term,” says Mordy.

The boom of emerging markets 2.0: beyond China

While China’s industrialization was the focal point of the first emerging market boom, the current phase encompasses a broader range of emerging market countries. India stands out as the central hub of this new cycle. Mordy highlights in particular the current infrastructure boom in India, which includes significant investments in roads, bridges and trains.

“We are now in the midst of a capital investment boom,” he says. “We can see this through a marked increase in gross capital formation and a surge in announcements of new private sector projects.” He added that the country is well positioned because of its young, English-speaking population, a banking system inherited from British rule and a diversified economy capable of moving up the value-added manufacturing chain.

Other emerging markets, such as Brazil, Chile and South Africa, are benefiting from the global push for decarbonisation, which has increased demand for raw materials. In addition, countries such as Vietnam, Indonesia and Mexico are taking advantage of supply chain diversification as companies look for alternatives to China. Mordy also points to the Gulf states, which are taking advantage of their strategic location and resources to diversify their economies away from fossil fuels.

“It shouldn’t be hard to see what’s happening here. Rising infrastructure, investment and trade are integrating more of the world’s developing economies into the global economy,” Mordy says. “Excluding China, these countries have more than 3 billion people, demographics are favorable, incomes are growing, and constructive dialogues are leading to increased economic, trade and cross-border partnerships. There are simply more people participating in the growth this time.”

A changing global landscape

Mordy points out that the current emerging market boom is fundamentally different from its predecessor. Unlike the previous boom, which was largely deflationary due to the influx of cheap Chinese goods, the new boom is likely to have an inflationary impact due to the large scale of economic activity and investment across multiple regions.

“The rise of China in the 2000s was a huge deflationary force in the world,” he says. “This one is not so deflationary. In fact, it is more inflationary because there is a lot of trade and new economic activity around the world. There is a huge amount of public and private money flowing into capital projects of all kinds, which is creating an investment boom in all corners of the world and a recovery in aggregate demand.”

Another significant trend is the formation of a “parallel economic ecosystem” outside the United States. In the past, capital generated by trade often flowed back into the U.S. economy. Now, money is flowing back into domestic markets, funding business dynamism in emerging markets. “We’re seeing capital moving in a different way, and that’s important because the foundation of economic growth is productivity. More investment in domestic economies means higher productivity,” Mordy said.

The resilience of emerging markets during recent economic challenges has surprised many investors. Mordy explains that most emerging market economies entered the pandemic with stronger financial discipline and lower debt levels compared to Western nations. As a result, they emerged from the pandemic with better fiscal positions, stronger balance sheets and lower external vulnerabilities.

One of the key factors supporting emerging markets is the relatively low valuation of their currencies, which Mordy describes as a “trick” for national economies. “Low currency valuations have always been a great starting point for emerging market outperformance. Today, they have greater competitiveness through weaker currencies, which attracts capital and then higher growth. You get this virtuous circle going forward,” he explains.

Looking ahead, Mordy believes emerging markets are on the threshold of a major growth cycle, driven by structural factors such as favourable demographics, rising incomes and deepening economic integration. He notes that while these markets have underperformed and been under-appreciated over the past decade, they are now starting to attract the attention of global investors.

“We’re in the early stages of emerging markets becoming acceptable as an asset class again, and for the last decade they haven’t been,” Mordy said. “The current situation for emerging markets to outperform is the best we’ve had in decades.”