Emerging Markets vs. S&P 500: A Historical Perspective

The performance ratio between the MSCI Emerging Markets Index and the S&P 500 Total Return Index offers a fascinating look at how these two segments of the global market have performed over the last 35 years. This ratio chart, highlighted by Charlie Bilello, reveals four distinct phases where either emerging markets or the US market took the lead. With the current ratio at record lows, there’s growing optimism that the tide may soon turn in favor of emerging markets.

The Four Major Phases of Performance

1989 to 1994: Emerging Markets Outperform
Emerging markets delivered exceptional returns, pushing the ratio from 0.5 to 1.2. This period was characterized by rapid growth and increasing global interest in developing economies.

1994 to 1999: US Outperforms
The US market dominated during this phase, and the ratio declined from 1.2 to 0.2. The tech boom and robust economic growth in the US drew significant capital away from emerging markets.

2000 to 2010: Emerging Markets Take the Lead
This was a golden era for emerging markets, fueled by strong economic expansion, commodity demand, and favorable demographics. The ratio climbed back to 1.0, signaling their significant outperformance over the US market.

2010 to 2024: US Outperforms Again
Over the last 14 years, the S&P 500 has significantly outperformed emerging markets, bringing the ratio down to a record low of 0.2. The US benefitted from technological advancements, corporate profitability, and global capital flows.

A Turning Point for Emerging Markets?

With the ratio at historic lows, there’s growing speculation that emerging markets could be on the verge of a strong comeback. Several factors support this thesis:

Undervaluation: Emerging markets are trading at relatively lower valuations compared to the US.

Demographics: Countries like India and Indonesia boast young, growing populations, driving consumption and economic growth.

Global Diversification: As US market concentration in a few tech stocks raises risks, investors may look for diversification in emerging markets.

Economic Shifts: Emerging markets are increasingly adopting technology and innovation, positioning themselves for long-term growth.

Why the Next 5-10 Years Could Belong to Emerging Markets

Cycles of outperformance tend to repeat over decades. If history is a guide, emerging markets could enter a new phase of dominance within the next 5-10 years.

Reallocation of Funds: Global funds currently focused on the US market could shift towards emerging markets as opportunities become more attractive.

Economic Potential: Emerging economies are expected to grow at a faster pace than developed economies, offering better returns for long-term investors.

Geopolitical Shifts: As global economic power continues to rebalance, emerging markets stand to benefit from increased trade and investment flows.

Opportunities for Indian Investors

For Indian investors, this potential shift presents an exciting opportunity. India, as one of the largest and fastest-growing emerging markets, could play a leading role in this resurgence. The next decade might be a “golden period” for emerging markets, offering strong returns for those willing to invest with patience and discipline.

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