U.S. equities have outperformed global markets over the past 15 years, supported by strong earnings, a revaluation of the market, and a robust U.S. dollar. In contrast, emerging markets have faced multiple crises, including the Asian financial crisis in the late 1990s, the Global Financial Crisis, and the COVID-19 pandemic. These events have left emerging market stocks and currencies trading at significant discounts compared to those in the United States.
According to Paul Psaila, Managing Director of the Emerging Markets Equity Team at Morgan Stanley Investment Management, "Having learned the hard way, EMs have rebuilt credibility through structural reforms, including balanced budgets and tightened monetary policy. Ironically, while many EMs have moved towards orthodoxy, the U.S. appears to be moving in the other direction, with growing policy volatility and government intervention. The fundamental differences that were instrumental to divergent equity market performance—politics, monetary and fiscal policies, earnings growth and external balances—are narrowing."
Psaila notes that this convergence is most visible in currency trends: "This convergence is most evident in currencies. In particular, the U.S. 'strong dollar' policy is waning, and USD weakness has ensued. This is likely to compress U.S. premiums compared to the rest of the world, significantly improving the outlook for returns outside the USD. We believe that once the AI (Artificial Intelligence)-led rally in the U.S. runs out of steam, EMs have the potential to outperform, a trend that is likely already underway."
Morgan Stanley Investment Management highlights several risks associated with investing in portfolios exposed to global markets: "There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk...you can lose money investing in a portfolio...Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than the risks generally associated with investments in foreign developed countries."
The firm also reminds investors that past performance does not guarantee future results and recommends evaluating long-term investment capacity before making decisions.
Morgan Stanley Investment Management serves as Morgan Stanley’s asset management division.