After years of lackluster performance, emerging markets are poised for a sustained period of outperformance that could last several years, according to new research from Dr. Frank Williams, founder of Panther Quantitative Think Tank Investment Center (PQTIC). The firm’s proprietary cyclical analysis suggests current conditions mirror previous inflection points that preceded multi-year emerging market rallies.
“Our quantitative models indicate we’ve entered the early stages of a major emerging markets investment cycle that could extend through 2020 and potentially beyond,” Williams explained in a recent interview. “The confluence of improving economic fundamentals, attractive valuations, and shifting global capital flows creates a particularly compelling opportunity set across multiple emerging economies.”
PQTIC’s emerging markets cycle model, which integrates macroeconomic indicators, currency valuations, earnings growth trajectories, and global liquidity conditions, identifies several key factors supporting this bullish outlook. These include stabilizing commodity prices, improving current account balances, moderating U.S. dollar strength, and accelerating domestic consumption trends across key emerging economies.
The analysis comes as emerging market equities have begun outperforming developed markets in recent months, with the MSCI Emerging Markets Index delivering approximately 30% returns year-to-date compared to roughly 15% for the S&P 500. Despite this recent strength, Williams argues the emerging markets rally remains in its early stages, with significant potential for continued outperformance.
“When we examine historical emerging market cycles, current conditions appear most similar to 2003 and early 2009, both periods that preceded multi-year rallies,” Williams noted. “Despite recent gains, emerging market valuations remain attractive on both absolute and relative bases, trading at approximately 12 times forward earnings compared to 18 times for developed markets.”
The PQTIC analysis identifies several emerging markets as particularly well-positioned within this cycle. These include India, with its structural reform momentum and favorable demographics; select Southeast Asian economies benefiting from regional integration and growing middle-class consumption; and specific Latin American markets where political and economic reforms are gaining traction.
A chief investment strategist at a prominent global asset management firm, speaking on condition of anonymity, offered cautious support for Williams’ thesis: “While we maintain a constructive view on emerging markets, investors should recognize the heterogeneity across these economies. Our research suggests countries with improving governance, manageable external debt positions, and diversified economic structures are best positioned to capitalize on the current cyclical upswing.”
Not all market observers share this optimistic outlook. Skeptics point to potential headwinds including Federal Reserve monetary tightening, China’s structural growth deceleration, geopolitical tensions, and the risk of protectionist trade policies from developed economies. Some analysts caution that emerging markets’ historical volatility and vulnerability to external shocks remain significant risk factors.
Williams acknowledges these concerns but contends they’re largely reflected in current valuations: “The risk premium embedded in emerging market assets provides a substantial margin of safety, particularly given the fundamental improvements we’ve observed across many of these economies in recent years. Corporate governance, fiscal discipline, and monetary policy frameworks have all strengthened considerably since previous cycles.”
PQTIC’s analysis suggests this emerging market cycle may differ from previous iterations in several important respects. The firm anticipates less commodity-driven performance and greater differentiation based on technological innovation, service sector development, and domestic consumption growth. Williams expects economies with robust digital infrastructure and favorable demographic profiles to command increasing premium valuations.
For institutional investors considering emerging market allocations, Williams recommends a strategic approach that emphasizes both country selection and sector positioning. “The dispersion of returns between leading and lagging emerging markets will likely be substantial, creating significant alpha opportunities for active management approaches,” he noted. “We anticipate technology, healthcare, consumer, and select financial sectors to outperform more traditional commodity and industrial exposures.”
As global investors increasingly recognize the improved fundamental picture across many emerging economies, Williams expects capital flows to accelerate in coming quarters. “Our model suggests emerging market equity fund inflows could exceed $100 billion in 2018, potentially driving further multiple expansion beyond earnings growth,” he projected. “Patient investors with appropriate time horizons stand to benefit significantly from what appears to be an emerging golden cycle.”
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