Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 487

Why emerging markets have reached an inflexion point

Emerging market indices have performed poorly over the past 10 years. Economic growth in these markets started to stall even before Covid and that prompted many investors to head for the exits.

But the decade-long sell-off has led to attractive valuations at a time when a commodity super-cycle could pave the way for outperformance.

Transition metals and emerging markets

A major theme in recent years is decarbonisation. Major economies are beginning to wean themselves off fossil fuels and are looking for new ways to curb emissions, with many aiming to achieve net zero between 2030 and 2050.

By current estimates, US$56 trillion in incremental infrastructure investment is needed to meet net zero by 2050. This implies an average investment of US$1.9 trillion annually.

Central to achieving these emission targets will be transitioning our existing energy infrastructure to cleaner fuel sources, which places many emerging market nations in an enviable position.

That’s because the transition away from fossil fuels is likely to be metal intensive. Replacing existing fuel sources with renewable electricity and manufacturing batteries to store this power will require large volumes of metals such as copper, lithium, and rare earth elements.

Where are we going to find those metals? There's a little bit in Australia and there's a little bit in Canada, but the vast bulk of new metal discoveries we're going to need to make will be in Africa or South America.

Demand for these metals could begin to outpace supply, creating bottlenecks and price hikes – all to the benefit of producing nations. The scarcity of these resources also places significant power into the hands of local governments to raise tax revenues.

Peru and Chile, collectively producing 35% of global copper, provide a good example of this. However, neither Peru nor Chile are comfortable places to put more money. It costs billions of dollars to invest there.

If you’re Glencore or Goldfield – who are commissioning to put US$2 billion, US$3 billion or US$4 billion into each hole in the ground in Chile - they have to sit down with President Boric and say, ‘what's my royalty rate?’, ‘what's the taxation rate?’ And the threat of expropriation is high.

While this does present risks to producers, I believe that these risks have been priced in.

Attractive valuations versus developed markets

The demand for metals is expected to support the growth of emerging markets and widen the real GDP growth differential with western markets. This marks forward price-to-earning (P/E) ratios for the sector look attractive.

In part, this is attributable to the commitment of emerging nations to maintain tight monetary policy over the past decade. These economies have largely avoided using unconventional policies (such as quantitative easing). They also raised rates before developed economies – and remain ahead of the curve.

As developed economies struggle with soaring inflation and interest rates, monetary constraint has made emerging market economies resilient.

Attractive emerging markets forward price to earnings ratios

Emerging markets have fallen to valuation levels not seen since 2008 while earnings continue to climb.

Yet despite attractive valuations, international capital flows into emerging markets are close to record lows. Since the early 1990s, buying emerging markets at times when most investors are selling has proven to be a successful strategy.

Investor capital has exited emerging markets creating contrarian opportunities

*Korea, Taiwan, India, Brazil, Mexico, South Africa, Thailand, Indonesia, Philippines, Malaysia, Turkey. Source: CLSA, National Stock Exchanges, WFE as at 20 October 2022. The forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so. The information shown above is for illustrative purposes only and is not intended to be, and should not be, interpreted as recommendations or advice.

History may repeat

If I had told you back in 2002 to buy emerging markets, you would've thought I was mad. Emerging markets had been through an incredibly difficult crisis. The Indonesian economy had collapsed in 1997. The rupee went from 2,000 to the US dollar to 18,000 to the US dollar in the space of six months. The Thai baht collapsed. The Korean won collapsed.

But emerging markets did exactly what we thought they were going to do. Emerging market GDP grew. The emerging market growth story worked. China raised 750 million people out of poverty. Indonesia’s GDP has gone from US$200 billion to US$1.1 trillion. India is now a larger economy than the UK.

With that context in mind, the emerging market selloff could represent a good entry point for investors.

 

James Johnstone is Co-Head of Emerging & Frontier Markets at Redwheel, a Channel Capital partner. Access to the RWC Global Emerging Markets Fund is available to Australian investors via Channel Capital, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any investor.

For more articles and papers from Channel Capital and partners, click here.

 

RELATED ARTICLES

Four reasons emerging markets should outperform post-COVID

What to watch in post-pandemic 2021

Brazil on the eve of the World Cup

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Latest Updates

Planning

Will young Australians be better off than their parents?

For much of Australia’s history, each new generation has been better off than the last: better jobs and incomes as well as improved living standards. A new report assesses whether this time may be different.

Superannuation

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Investment strategies

A steady road to getting rich

The latest lists of Australia’s wealthiest individuals show that while overall wealth has continued to rise, gains by individuals haven't been uniform. Many might have been better off adopting a simpler investment strategy.

Economy

Would a corporate tax cut boost productivity in Australia?

As inflation eases, the Albanese government is switching its focus to lifting Australia’s sluggish productivity. Can corporate tax cuts reboot growth - or are we chasing a theory that doesn’t quite work here?

Are V-shaped market recoveries becoming more frequent?

April’s sharp rebound may feel familiar, but are V-shaped recoveries really more common in the post-COVID world? A look at market history suggests otherwise and hints that a common bias might be skewing perceptions.

Investment strategies

Asset allocation in a world of riskier developed markets

Old distinctions between developed and emerging market bonds no longer hold true. At a time where true diversification matters more than ever, this has big ramifications for the way that portfolios should be constructed.

Investment strategies

Top 5 investment reads

As the July school holiday break nears, here are some investment classics to put onto your reading list. The books offer lessons in investment strategy, financial disasters, and mergers and acquisitions.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.