Seafarer addresses how to invest in the emerging markets for the next decade.

Over the last three decades, many investors looked to the emerging markets (EM) under the assumption that underdeveloped economies would become richer, experience high rates of gross domestic product (GDP) growth, and provide equity performance. While GDP growth did occur, it did not always translate into equity market returns, particularly over the last decade. In the years ahead, many emerging markets are now expected to experience slower GDP growth than originally forecast. In this lower GDP growth scenario, how should developed market investors consider the emerging markets in the context of their overall portfolio?

1. Emerging markets offer diversification into non-U.S. dollar income streams.
   • While the S&P 500 has provided ample returns in the form of capital appreciation over the last decade, equity income (or dividends) has historically been another important, and overlooked, source of total return for equities.
   • Seeking income from multiple sources can help diversify a developed market investor’s total return.
   • Emerging market equities can provide an income source of return that can grow as company earnings grow over time.
   • The U.S. dollar is not guaranteed to be dominant in the future. Equity exposures too heavily weighted in one currency could increase investors’ risk of loss of purchasing power.
2. The “Lost Decade” in the emerging markets is over.
   • The “Lost Decade” in the EM, from 2012 to 2023, was characterized by anemic profit growth. In fact, Seafarer estimates that profits did not expand during the entire period when translated into U.S. dollars.¹
   • Since 2024, dividends have surged in the EM asset class. EM corporate management teams see robust and tangible earnings growth and are choosing to pay out rising dividends.
   • This strong earnings-led recovery is evidence the “Lost Decade” is over.
3. In emerging markets, investors should consider company fundamentals rather than thematic exposure, such as artificial intelligence (AI).
   • AI is already a material part of EM — most visibly through a handful of globally essential semiconductor champions.
   • The EM asset class’s exposure to AI is far more concentrated than most allocators realize, which makes understanding and managing that concentration an active portfolio management question.
   • Seafarer believes that participating in this growth industry warrants a fundamental, bottom-up approach grounded in valuation discipline – one that assesses the long-term cash flow generation of underlying businesses. This approach results in exposure that looks very different from that of the EM indices.

The views and information discussed in this commentary are as of the date of publication, are subject to change, and may not reflect Seafarer’s current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Seafarer does not accept any liability for losses either direct or consequential caused by the use of this information.

1. Between 12/31/12 and 12/31/23, Seafarer estimates that earnings growth among emerging market companies produced a compound annual growth rate of -1.4% when translated into U.S. dollar terms. This estimate is based on the performance of the constituents of the Bloomberg Emerging Markets Large, Mid, and Small Cap Net Return USD Index. Sources: Bloomberg; Seafarer.