Delaying What May Be Inevitable: Demographic Drivers in Emerging Market Equities

Global Equity Market Leadership Likely Has Staying Power

It’s a known phenomenon that equity market leadership between major geographic regions tends to be persistent once a clear frontrunner emerges. For example, the U.S. stock market outperformed international stocks for 14 years, beginning in 2008 and ending in 2022. Before that, international stocks took the reins for over seven years. The pattern continues back to at least 1970, trading performance leadership back and forth for several-year windows.

But, it’s the cumulative outperformance gained during these rather sticky cycles – not the sheer duration of them – that’s remarkable. Lasting performance waves have sometimes resulted in cumulative performance differentials well over 200 percent[3]. For investors holding portfolios concentrated in one region or another, this poses a major risk of missing out.

So, what triggers these super cycles? The relative strength of the U.S. dollar is a major contributor. When the dollar strengthens, as it can do for extended periods of time, returns of stock markets outside of the United States can be diminished. Conversely, when the dollar weakens, it’s a boost to returns when local currency is converted back to U.S. dollars.

This brings us to today. If recent relative stock market performance, valuations, and currency exchange rates are any indication, a new leadership cycle may be up for grabs, and it’s any region’s game.

The U.S. dollar appears to be easing after a period of relative strength. The Federal Reserve has reached the final stages of a rate-hike cycle that brought short-term interest rates to the highest levels in over 22 years. As of July 31, 2023, the U.S. Dollar Index traded at 101.62, down from 2022’s highs but still in a range not seen over a similar period of time.

With the Fed pushing pause on U.S. rate hikes, upward pressure on a still-strong U.S. dollar should ease. This could be a key catalyst to usher in a cycle of equity performance leadership outside of the U.S. Critically, it provides a major measure of relief for developing economies, who are the most sensitive to dollar strengthening and weakening cycles.

Calling the timing of a reversal in a major trend is a fool’s errand, especially based on past performance and valuations, but compelling demographic data exists to corroborate the case for why the grass may be growing greener on the emerging markets side.

Emerging Market Demographic Data Strengthens

Demographics and fundamentals can be muted for some time, but eventually, they can become powerful drivers of long-run economic growth and subsequent broad equity market returns.

According to projections by the International Monetary Fund (IMF) drafted in 2022, economies of emerging markets are expected to grow by 4.1 percent in 2024. This is a far cry from the 1.4 percent estimated for more advanced economies.

It’s well known that behind these projections are exploding populations within developing markets. The trend within the trend, however, is that rising incomes have accelerated past population increases[4] to create a ballooning middle class.

As a result, global consulting firm McKinsey estimates that global middle class consumption will reach $64 trillion by 2025. (This marks an increase from just $38 trillion in 2010.) Emerging economies are expected to account for nearly half of this new global total spending.

Being early and being wrong can be one in the same, but greater disposable income within the pockets of consumers in developing markets is inevitable. These growth trends will create opportunities in every region, every asset class, and every size company within emerging economies.

Actionable Idea: WisdomTree Emerging Markets High Dividend Fund (DEM)

WisdomTree Emerging Markets High Dividend Fund (DEM) offers exposure to high-dividend-yielding emerging markets companies that span the market capitalization spectrum. DEM tracks a rules-based index that follows a consistent, systematic process to arrive at a fundamentally-weighted portfolio.

To select companies, WisdomTree ranks the potential emerging markets universe by dividend yield. It then selects the 30 percent highest-yielding companies with positive one-year trailing earnings. Finally, the remaining companies are weighted by annual cash dividends paid, which bases portfolio allocations on an objective measure of company health and profitability – one that is challenging to compromise with accounting methods or government decisions.

The result is a deep value portfolio diversified across approximately 450 emerging markets names. With heavier weights in sectors like materials and energy, this fund provides a counterbalance to high-growth tech companies, like the Googles and Nvidias of the world. Within a globally-diversified portfolio, this rules-based fund is a choice for an income-producing emerging markets sleeve.

Important Information:

For holdings in DEM, please click here.

For definitions of terms in the article, please visit the glossary.

Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time.

There are risks associated with investing including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Fund's focusing on a single sector generally experience greater price volatility. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than developed markets and are subject to additional risks, such as adverse governmental regulation, intervention and political developments. Due to the investment strategy of this Fund it may make higher capital gain distributions than other ETFs. Please read the Fund's prospectus for specific details regarding the Fund's risk profile.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus containing this and other important information, please call 866.909.9473, or visit WisdomTree.com/investments to view or download a prospectus. Investors should read the prospectus carefully before investing.

WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S

1 Performance data provided by Investing.com. S&P 500 Total Return Index. Performance period covers 8/1/2008 to 7/31/2023.

2 Performance data provided by Investing.com. MSCI Emerging Markets Index, using Net Returns. Performance period covers 8/1/2008 to 7/31/2023.

3 Performance data provided by Investing.com. Compares relative performance of MSCI EAFE Index, using Net Returns, to the MSCI USA Index. Performance period covers 1/1/1971 to 7/31/2023.

4 Yuval Atsmon, Peter Child, Richard Dobbs and Laxman Narasimhan, “Winning the $30 trillion decathlon: Going for gold in emerging markets,” McKinsey & Company, 8/12.

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