EXECUTIVE SUMMARY
The decade-long run of outperformance enjoyed by emerging market equities in the early 2000s came to an end as global growth slumped following the Global Financial Crisis (GFC). With emerging market economies experiencing an even more pronounced post-GFC slowdown, emerging market equities became hindered by margin compression and currency headwinds. The impact of these conditions has lasted longer than anticipated, so while emerging markets have historically been favored due to their relative inefficiency and low correlations to developed markets, asset owners haven’t been rewarded for their emerging markets allocations for quite some time until recently.
While timing asset class allocations is notoriously difficult, we believe now is a good entry point for long-term investors to consider a more constructive position on emerging markets even with the recent rally. Our perspective is anchored in three key pillars:
Historic Valuation Opportunity: The valuation differential between emerging and developed markets is now at its most extreme since the dot-com era, sitting over one standard deviation cheaper than historical norms—creating a compelling entry point.
Future Growth Expectations: Buoyed by favorable demographics and a growing middle class, emerging markets’ contribution to global economic growth will continue to rise. Improvements in corporate governance will help translate GDP growth into corporate earnings growth.
Macro Tailwinds: Lower than expected inflation and the current interest rate cutting cycle have already reduced demand for the US Dollar. Coupled with a resilient global economy, emerging markets equities are poised to benefit from these tailwinds.
For Financial Professional Use Only. Not for use with the public.
The views expressed herein are those of PGIM Quantitative Solutions investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute an offer to sell or a solicitation to buy any security.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information, nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
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