Emerging Markets Are Now Diverging Markets | American Funds

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Midyear Outlook

Global Growth | emerging markets | July 2015
Emerging Markets Are Now Diverging Markets

When Eyeing Opportunities, Focus on Individual Companies — Not Markets and Economies

“China’s transition from an investment- to a consumer-driven economy will have profound consequences for investors, but our research suggests there will continue to be attractive longer term opportunities for research-driven active investors as the economy slows toward a more sustainable pace of growth.”

Robert Lovelace
Robert W. Lovelace Portfolio Manager 31 years of experience (as of 12/31/16)

Against an Uneven Backdrop, Individual Firms Have Shined

Charts show projected GDP growth and forward P/E for various emerging markets and three-year revenue growth for individual emerging markets companies

Sources: International Monetary Fund and FactSet.
*Annualized three-year revenue growth as of 12/31/14.
Economic growth forecasts from April 2015 IMF World Economic Outlook Database; 12-month forward price-to-earnings ratios as of 4/30/15.

Broad confidence in emerging markets has taken some knocks, fueled by somewhat slower growth in China. At times like these, it’s important to look at the bigger picture. The “emerging markets” category includes a diverse set of countries, markets and companies. Certain nations (notably, Russia and Brazil) are confronted with significant near-term economic imbalances. Other economies such as India, Mexico and Indonesia are in better shape with positive structural reforms underway.

Chinese and Russian stocks have recorded substantial year-to-date total returns, while other markets have posted modest gains or losses. Likewise, by some measures, there’s meaningful variation among valuations. Against this uneven backdrop, it’s important for investors to maintain a focus on individual companies. Deep, company by company research helps identify those firms that should thrive over the long term.

There continues to be attractive opportunities in both challenged economies, such as Brazil, as well as fast-growing ones like India. Meanwhile, recent developments in Brazil, Russia and China have underscored the importance of staying on top of corporate governance with a research-driven active approach to investing.

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Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.