We expect emerging markets to outperform developed markets over the long run. On our estimate the premium is worth roughly 1.5% a year. It is real, but it is slow and uneven, and it is best captured by owning the whole opportunity set rather than guessing which country leads next.
By: Bastian Teichgreeber, Chief Investment Officer at Prescient Investment Management.
The case for an emerging-market premium rests on data and structure, not on headlines. Emerging economies carry lower aggregate structural debt than developed peers. Their demographics are more favourable. They retain more room for productivity gains as capital, institutions and technology converge toward the developed-market frontier. These tailwinds are slow-moving and durable, and together they support a positive long-run equity premium over developed markets. Valuation reinforces the case. Emerging markets currently trade on a forward earnings multiple of about 12, against about 19 for developed markets, and they offer a higher starting dividend yield. The same future cash flows cost less. We size the resulting premium conservatively at about 1.5% a year. That number is an estimate rather than an observed quantity, and it is conditional on continued institutional progress and macroeconomic stability, not guaranteed by geography. We treat it as a structural input to our process, not a forecast.
The premium does not arrive evenly. Equity returns break down into earnings growth, valuation re-rating, dividends and, for a hard-currency investor, the currency path. In emerging markets these components often work against each other for years at a time. Sound earnings have repeatedly been cancelled out by a stronger dollar and a falling multiple, holding back realised returns even where the underlying fundamentals were intact. The record shows this plainly. Emerging markets lagged developed markets for most of the decade after 2011. They then turned sharply, and the MSCI Emerging Markets Index returned close to 47% in dollars over the past year as several of those headwinds reversed together. A premium that holds over twenty years can be absent over ten. Its variance is high and its timing is uncertain. Both facts hold at once: the reward exists, and it can take a long time to appear. For a systematic investor the implication is to stay invested through the quiet years rather than chase the loud ones.
Emerging markets are not a fixed set of countries. The index reweights itself continuously as prices move. Malaysia fell from roughly 28% of the benchmark in the mid-1990s to about 1% today. China entered near zero in 1996, rose to almost 40% by 2020, and has since been marked back toward 27%. Brazil halved and then halved again. India and Taiwan together climbed from around 4% to roughly 17%. The mechanism is structural. In a cap-weighted index a country's weight is its relative price performance, so winners compound into a larger share, and losers shrink toward zero with no trade required. The standard response is to pick the right countries in advance. The data on doing this repeatably is not encouraging. The winners are clear only after the fact, and any backward look is flattered by the markets that were written down or dropped along the way.
This is why we diversify broadly rather than concentrate. Picking the leading market requires two correct decisions in sequence: identifying the eventual winner, and timing both the entry and the exit. The evidence that this can be done consistently is thin. A cap-weighted index captures the same rotation mechanically, at very low turnover and without a forecast. The MSCI Emerging Markets Index gives us that exposure in a single, efficient holding: more than 1,200 constituents across 24 countries, transparent, liquid, low cost, and continuously tilted toward whatever is currently winning. We then apply enhanced indexation on top, targeting roughly 1% a year above the benchmark through systematic, risk-controlled portable Alpha, while keeping the breadth and cost of the index. Over the past year our fund returned about 56%.
The combination is deliberate: the full emerging-market opportunity set, the rotation that cap-weighting delivers at no cost, and a measured, repeatable increment on top. The premium is real, the path is uncertain, and the most reliable way to be paid for it is to hold the whole market and add value systematically rather than to trade the headlines.
Disclaimer:
Prescient Investment Management (Pty) Ltd is an authorised Financial Services Provider (FSP 612) in terms of the Financial Advisory and Intermediary Services Act, 2002 (FAIS).
The information in this document is provided for general information purposes only and is not intended to constitute financial advice (as defined in FAIS), investment advice, a recommendation, or an invitation/offer to issue, sell, subscribe for, or purchase any financial product. Any views or opinions expressed are those of the author (unless otherwise stated) and may change without notice. Past performance (if referenced) is not necessarily indicative of future performance, and no guarantee is given as to future returns. While reasonable care has been taken in preparing this document, no representation or warranty (express or implied) is made as to the accuracy, completeness, or fairness of the information, and Prescient Investment Management (Pty) Ltd and its affiliates disclaim liability for any loss, damage, cost, or expense (whether direct, indirect, or consequential) arising from reliance on this information. This document may contain proprietary material and is protected by copyright law. For more information visit www.prescient.co.za.
