Are Emerging Markets Poised to Outperform US Equities?
For nearly 75 years, emerging markets and US equities have experienced long, alternating cycles.
A recent chart from Bank of America Global Research (see the image above) suggests that we may be on the verge of a new phase in which emerging markets start to excel.
A History of Cyclical Shifts
The chart illustrates the performance ratio of emerging markets compared to US equities in dollar terms. It reveals a cyclical pattern: each time the ratio reached extreme highs or lows, a reversal followed. In the mid-1980s to early 1990s, emerging markets significantly outperformed, coinciding with the well-known Harshad Mehta boom in India. Another major cycle occurred between 2000 and 2008, when emerging markets once again outpaced US equities.
US Dominance Since 2010
However, since 2010, US equities have predominantly outperformed emerging markets. A major factor contributing to this trend has been the underperformance of China and Hong Kong. Although India has shown relative strength, it hasn’t been enough to lift the entire basket of emerging markets. Consequently, the performance ratio has approached its lower bounds, suggesting that US equities may be nearing the end of their dominance.
A Turning Point Ahead?
While there is no definitive rule stating that the ratio must rebound immediately, historical trends indicate that such low points have often marked the beginning of a shift. It may take several years for a reversal to occur, or the trend might stabilize for a time. Nevertheless, the likelihood of emerging markets outperforming in the coming decade appears strong.
The Case for Long-Term Rebalancing
This isn’t a call to abandon US equities, but rather a reminder that investment leadership changes over time. Long-term investors may want to reconsider their global allocations if they have been heavily tilted toward the US. Emerging markets could be ready to take the spotlight.
Do you believe the tide is turning in favor of emerging markets? Share your thoughts in the comments below! If you found this blog insightful, please SHARE it with your network!
