The case for emerging markets

Emerging markets equities can offer outsized potential and portfolio diversification benefits to investors for three reasons.

First, emerging markets tend to exhibit a substantial demographic advantage over developed markets due to their youthful populations and increasing urbanization rates. These dynamics have the potential to drive faster economic growth in emerging economies. Companies in emerging markets may be better positioned than in the past to capture this economic growth and create value for investors.

Second, emerging markets equities can also serve as an important diversification tool within investor portfolios because of emerging markets' unique economic market cycles and moderate correlation with developed markets.

Third, the greater number of inefficiencies in these markets can create a landscape ripe for alpha generation.

Economic growth drivers: Demographics and urbanization

The International Monetary Fund estimates that emerging and developing economies will grow at 3.9% per year over the next five years, more than double the anticipated 1.7% growth rate for advanced economies.

Emerging economies are expected to grow faster than advanced economies
 

We believe a more favorable demographic profile is a key driver of developing economies’ higher structural growth, particularly in markets outside China. As recently as 2022, the proportion of the population under 40 years old was approximately 66% in developing economies, and 71% if China is excluded, compared with 47% in developed economies, according to United Nations Trade and Development (UNCTAD). Due to younger demographics and higher birth rates, the population of developing economies is expected to grow at a 0.8% rate through 2050, compared with flat growth in developed economies. This “demographic dividend” implies that a larger workforce can support economic growth and higher consumption.

Population is growing in developing economies
 

Rising urbanization rates also contribute to economic growth in developing economies because access to infrastructure and services increases productivity levels. According to UNCTAD, urbanization rates in developing economies are 52% as of 2022 (versus ~80% in developed economies) but are expected to increase to 65% by 2050.

People in developing economies are moving to cities
 

Growth and value creation

Though emerging (and developing) markets have generally grown faster than developed markets, investors have rightly pointed out the challenges that weigh on the ability of investors in emerging market companies to fully benefit from that growth. These challenges include the following:

• Government policies have sometimes encouraged excessive fixed-asset investment, leading to overcapacity and thus lowering returns on capital.

• Corporate governance has often placed a lower relative priority on transparency and minority rights.

• Economic growth has often been concentrated in industries lower in the value chain, where valuation multiples are typically smaller.

We see numerous, evolving reasons to be optimistic about the potential ability of emerging market companies to generate value for shareholders.

First, the higher interest rate environment has made companies more cautious about deploying capital in lower return projects and potentially improving competitive dynamics. 

Second, in places like South Korea, we are observing increased scrutiny on corporate governance practices from large domestic institutional investors and government policymakers.

Third, in multiple industries, emerging market companies have begun to establish higher positions on the value curve. For example, in the leading-edge semiconductor space, we find emerging market companies’ technological capabilities to be on par with, if not exceeding, those of their developed market counterparts. In certain consumer sectors, emerging market companies are gaining market share from developed market competitors by narrowing the perceived quality gap and innovating in differentiated ways that better target local tastes and trends.

Portfolio diversification

Emerging markets equities can also offer diversification benefits to investor portfolios concentrated in US and developed markets equities due to historically lower correlations and non-concurrent economic and market cycles.

Emerging markets equities can offer diversification benefits
 

This diversification benefit has the potential to grow as emerging economies become increasingly important, independent parts of the world economy. The continued emergence of a large and growing middle class in emerging economies has created a powerful source of domestic demand in many countries. Trade and capital flows between emerging economies have increased substantially as global supply chains have continued to reconfigure.

Alpha generation opportunity

In addition to contributing to portfolio diversification, emerging markets equities may offer an appealing universe for active managers to generate alpha. These markets typically have less analyst and news coverage and have lower institutional investor participation than developed markets. These factors may contribute to lower overall market efficiency and could increase the opportunities for active managers to generate excess returns.

Quantitative analysis seems to support this thesis. The amount of variation in performance and price movement between emerging market stocks over the past 20 years has been notably higher than that of US or developed market stocks, suggesting opportunity for stock selection in emerging markets. Historical performance of active fund managers offers an additional perspective. An analysis of active managers that invest in emerging markets or developed markets equities shows that a higher proportion of emerging markets equity managers have been able to beat their benchmarks over time.

Emerging markets equity managers can outperform
 

Opportunity in emerging markets equity

We believe emerging markets equities offer a compelling blend of opportunities for investors. Economic growth premiums in emerging markets continue to be supported by structural factors, and evolving conditions potentially support more value to accrue to equity investors. Meanwhile, the distinct characteristics of emerging markets equities as an asset class offer investors the ability to benefit from diversification and potential excess returns generated by active management.

Learn more about our investment solutions, including Macquarie Focused Emerging Markets Equity ETF (EMEQ), an actively managed portfolio of 35-60 stocks seeking to capitalize on high-conviction investment ideas in emerging markets.

Investing in any exchange-traded fund involves the risk that you may lose part or all of the money you invest.

The Macquarie ETF Trust Funds are distributed by Foreside Financial Services, LLC. Foreside Financial Services, LLC is not affiliated with any Macquarie entity, including Macquarie Asset Management and Delaware Distributors, L.P.

Carefully consider the Fund's investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Fund's prospectus or the summary prospectus, which may be obtained by visiting the Macquarie ETF Trust resource pages or calling 844 469-9911. Read the prospectus carefully before investing.

Investing involves risk, including the risk of principal loss. Diversification does neither ensure a profit nor guarantee against loss in a declining market. 

Foreign and emerging markets risk is the risk that international investing (particularly in emerging markets) may be adversely affected by political instability; changes in currency exchange rates; inefficient markets and higher transaction costs; foreign economic conditions; the imposition of economic or trade sanctions; or inadequate or different regulatory and accounting standards. The risk associated with international investing will be greater in emerging markets than in more developed foreign markets because, among other things, emerging markets may have less stable political and economic environments. In addition, there often is substantially less publicly available information about issuers and such information tends to be of a lesser quality. Economic markets and structures tend to be less mature and diverse, and the securities markets may also be smaller, less liquid, and subject to greater price volatility.

Diversification does neither ensure a profit nor guarantee against loss in a declining market. The Fund is actively-managed and may not meet its investment objective based on the Adviser’s success or failure to implement investment strategies for the Fund. The Adviser’s evaluations and assumptions regarding issuers, securities, and other factors may not successfully achieve the Fund’s investment objective given actual market conditions. Macquarie ETF Trust exchange-traded funds (ETFs) are actively managed and do not seek to replicate a specific index. ETF shares are bought and sold through an exchange at the then current market price, not net asset value (NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV when traded on an exchange. Brokerage commissions will reduce returns. There can be no guarantee that an active market for ETFs will develop or be maintained, or that the ETF's listing will continue or remain unchanged.

The MSCI Emerging Markets Index represents large- and mid-cap stocks across emerging market countries worldwide. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI EAFE (Europe, Australasia, Far East) Index represents large- and mid-cap stocks across 21 developed markets, excluding the US and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value and is often used to represent performance of the US stock market.

The Morningstar Diversified Emerging Markets Category compares funds that tend to divide their assets among 20 or more nations but tend to focus on the emerging markets of Asia and Latin America rather than on those of the Middle East, Africa, or Europe. These funds invest predominantly in emerging market equities, though some invest in both equities and fixed income investments from emerging markets.

The Morningstar Foreign Large Blend Category compares funds that invest in a variety of big international stocks. Most of these funds divide their assets among a dozen or more developed markets, including Japan, Britain, France, and Germany. These funds primarily invest in stocks that have market caps in the top 70% of each economically integrated market (such as Europe or Asia ex Japan). The blend style is assigned to portfolios where neither growth nor value characteristics predominate. These funds typically will have less than 20% of assets invested in US stocks.

The Morningstar Large-Blend Category compares funds that invest in large-cap stocks, using a blend style in which neither growth nor value characteristics predominate. These funds tend to invest across the spectrum of US industries, and owing to their broad exposure, the funds’ returns are often similar to those of the S&P 500® Index.

Alpha is a measure of risk-adjusted performance.

All third-party marks cited are the property of their respective owners.

Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.

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