Four Key Metrics Behind Long-Term EM Stock Growth

Emerging-market (EM) equities have underperformed those in the developed markets (DM) since the global financial crisis (GFC) in 2008, reversing the trend of the preceding decade. We sought reasons for this turn of events and why certain EM stocks were able to outperform after the GFC.

Long-term compounders bucked trend of headline EM underperformance

Drawing on nearly 30 years of index- and stock-level returns, and leveraging a new MSCI equity factor model, we identified shared fundamental attributes — profitability, stable cash flows and disciplined capital allocation — of these EM success stories, which we call “long-term compounders.” Across the broad EM universe, as well as EM ex China and EM small-cap stocks, dividend yield, investment quality, profitability and low earnings variability were most associated with long-term compounders.¹

The overall underperformance of EM in the post-GFC period can be chiefly explained by a disconnect between topline economic growth and per-share returns. Our research shows that despite a rising share of global GDP and a larger universe of listed securities, persistent share dilution and sagging profitability have been a return drag on EM stocks.

Asia EM outpaced EM in Latin America and EMEA after GFC

China's significant weight in EM indexes, combined with its lower returns, explains a large part of MSCI’s headline EM equity indexes’ underperformance since 2009. In contrast, EM Asia ex China — led by India, Taiwan and Korea — has been competitive with U.S. equities, powered by growth-oriented tech stocks. The region’s strength marks a turnaround from the 1997-2008 period when the Asian currency crisis resulted in capital flight, currency devaluation and slow economic growth that weighed on stock returns.

Identifying EM compounder stocks using fundamental metrics such as profitability, yield, capital control and earnings stability may suggest opportunities for active managers (fundamental or systematic), while also suggesting sensible tilts for indexed-based investors.