Emerging-market stock capitalization is set to eclipse that of the US by the end of the decade as incomes grow and investors gain deeper access to public exchanges worldwide, according to Goldman Sachs Group Inc.
(Bloomberg) — Emerging-market stock capitalization is set to eclipse that of the US by the end of the decade as incomes grow and investors gain deeper access to public exchanges worldwide, according to Goldman Sachs Group Inc.
Analysts at Goldman including Tadas Gedminas and Kevin Daly converted economic growth projections into estimates of equity market capitalization, and concluded that the US’s global share will fall from 42% in 2022 to around 35% in 2030. In the same period, emerging markets’ share will rise from around 27% to 35% and keep growing from there, they said.
Even as real GDP growth has slowed in both developed and emerging economies in recent years, income convergence continued despite the variety of shocks that the global economy has faced, including the global financial crisis and Covid pandemic.
“The most important dynamic underlying EM capital market growth in our projections is the equitization of corporate assets, the deepening of capital markets, and the disintermediation that takes place as financial development proceeds,” Goldman said in a note emailed on Friday, citing reports originally published on June 8.
Growth Pace
In 2022, emerging markets represented around 27% of total global market cap, compared with around 45% of global GDP measured in dollars, according to the report. Yet developing economies are projected to grow at an average pace of 3.8%, more than double the 1.8% forecast for advanced nations, due to more favorable demographics and increases in productivity over the remainder of the decade, Goldman said.
“This does not have a clear implication for the performance of equities themselves,” according to the report. “That said, our economists expect EM equities to outperform DM stocks in the longer run because of stronger long-run earnings growth and valuation multiple expansion as risk premia fall.”
Goldman’s projections support calls by Wall Street firms such as Morgan Stanley Investment Management and AQR Capital Management LLC to reduce exposure to US equities and invest more in emerging markets.
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The calls came amid extended underperformance by EM equities. The benchmark MSCI emerging markets index has gained less than 4% this year, failing to match the pace of equity gains in the US, where the S&P 500 is up 14% and the Nasdaq 100 has soared 38%.
This extends a decade of underperformance when EM equities returned 10% versus more than 100% for developed-market equities.
Goldman projects India to record the largest increase in global market cap share from under 3% in 2022 to 8% in 2050, while China’s share is poised to rise from 10% to 15%. China will overtake the US as the world’s largest economy around 2035, and by the middle of the century the world’s five largest economies are set to be China, the US, India, Indonesia and Germany, the report projected.
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