Emerging market equities poised to overtake developed market equities

Episode Summary

Executive Summary: The episode argues that emerging market capital markets are likely to expand dramatically over the next decades as EM GDP rises and equity markets become more “equitized,” while developed markets—especially the U.S.—lose relative share. Kevin Daly says long-run forecasting is easier than short-run forecasting because cyclical noise fades, and identifies globalization, policy, demographics, and AI as the main forces shaping outcomes.

Main Topics: Long-run forecast methodology (Priority: 5/5): Kevin Daly explains why 50-year forecasting can be more reliable than short-term forecasting: business-cycle volatility matters less over time, while productivity and population trends dominate. Structural shift toward emerging markets (Priority: 5/5): The core thesis is that emerging markets will grow in both GDP and equity market capitalization, increasing their influence on global capital markets. Decline in U.S. and developed-market share (Priority: 5/5): As EMs rise, the U.S. and other developed markets are expected to lose global equity market share, ending the recent era of U.S. exceptionalism. GDP per capita and market capitalization link (Priority: 4/5): The team’s framework links richer countries to higher equity market capitalization ratios, driven mainly by greater equitization of corporate assets and, secondarily, higher valuation multiples. Investor implications and portfolio diversification (Priority: 4/5): The discussion emphasizes global diversification and cautions that past U.S. outperformance does not guarantee future leadership; EM equities may benefit from growth and rising multiples over time. Key risks: policy and globalization (Priority: 5/5): The biggest downside risk is policy-driven erosion of openness to trade and capital flows, including protectionism, tariffs, Brexit-like effects, and supply-chain de-risking. AI as an upside risk (Priority: 3/5): Generative AI is presented as a major upside risk to global growth and capital markets, though likely a relatively larger boost to developed markets than emerging markets.

Key Arguments: Long-term forecasts are more tractable than short-term ones because cyclical shocks mean-revert and long-run outcomes depend more on demographics and productivity. Global population growth has slowed sharply and is projected to approach zero over the next 50 years, creating slower global growth and pension challenges. Emerging market convergence remains intact, with larger EMs—especially in Asia—continuing to grow faster than developed economies. Richer economies tend to have more equitized capital markets, meaning more corporate assets are listed and traded publicly. The main driver of rising EM market share is not just faster GDP growth but also rising equity market capitalization ratios within EMs. Higher EM market capitalization does not automatically mean higher returns, because much of the increase comes from converting private/family businesses into public firms. Over the long term, EM equities could still outperform due to faster earnings growth and rising valuation multiples as countries become richer and perceived as less risky. The U.S. share of global equity markets is likely to fall materially, so recent U.S. outperformance should not be extrapolated indefinitely. Globalization stalling or reversing would be the biggest threat to the forecast because capital-market development depends on open trade and capital flows. Generative AI likely lifts growth and market activity overall, but may benefit developed markets more than EMs in relative-share terms.

Data Points: Global population growth (past 50 years): from 2% per year to 1% per year - Kevin Daly described the slowdown in global population growth as a key force behind slower long-run economic growth. Projected global population growth (next 50 years): basically zero - Used to explain why global growth is expected to slow over the long term. Projected global growth: a little below 3% - One of the four key themes in the long-term macro outlook. World’s five largest economies by 2050: China, the US, India, Indonesia, Germany - Long-range GDP ranking projection from Goldman Sachs Research. Top 10 economies by 2075: 7 of the top 10 expected to be current EM economies - Highlights the continued convergence of EMs toward developed-market economic scale. Current EM share of global equity market capitalization: around 27% - Starting point for the forecast of global equity market shares. EM share of global equity market capitalization by 2030: 35% - Projected early stage of EM market-cap expansion. EM share of global equity market capitalization by 2050: 47% - Projection showing EMs nearing parity with developed markets. EM share of global equity market capitalization by 2075: 55% - Projected to exceed half of global equity market capitalization. Current U.S. share of global equity market capitalization: around 42% - Baseline used to show expected decline in U.S. dominance. U.S. share of global equity market capitalization by 2050: 27% - Projected decline in the U.S. relative weight in global markets. U.S. share of global equity market capitalization by 2075: 22% - Further decline under the long-term forecast. India’s current share of global equity: about 2% to 3% - Starting point for the largest projected gainer among major EMs. India’s share of global equity by 2050: 8% - Shows strong long-run expansion in India’s market weight. India’s share of global equity by 2075: 12% - Projected to become a major global equity market. China’s current share of global equity: around 10% - Baseline for China’s projected path. China’s share of global equity by 2050: 15% - China rises in importance in the medium-long term. China’s share of global equity by 2075: 13% - Projected decline from 2050 due to weaker demographics than India.

Pivotal Quotes: "EM capital markets, in particular, are likely to rise very significantly." — Allison Nathan: Opening framing of the episode’s central thesis about the future of global equity markets. "You get two bangs for your buck, as it were." — Kevin Daly: Explaining why EM market capitalization rises both because EM GDP grows and because equity market capitalization ratios also rise. "The biggest risk to our equity market capitalization forecast [is] any policy that would reduce openness to trade and capital flows over time." — Kevin Daly: Discussion of the main downside risk to the long-run forecast.

Implications: Investors should expect a more multipolar equity landscape, with EMs taking a larger share of global markets. Long-term portfolios may need greater EM exposure, while policy and globalization risks remain central.