Pension funds and other institutional investors based in developed markets could raise their emerging markets equity weighting to 18% in the next 20 years from the current 6%, according to research from Goldman Sachs, driven by an expectation of emerging markets eventually having the largest share of the global equity market.
That increase could mean those investors could purchase at least $4 trillion in emerging markets equities over the next 20 years, according to an estimate from Timothy Moe, Goldman Sachs chief Asia Pacific regional equity strategist, and Caesar Maasry and Richard Tang, both members of the Asia Pacific portfolio strategy team. All three are co-authors of a 48-page report, “EM Equity in Two Decades: A Changing Landscape.”
Those new allocations could amount to $8 trillion instead if “only moderately higher assumptions” are used for real growth in assets under management and emerging market allocations, they write.
By 2030, emerging markets equity capitalization could rise to $80 trillion, or a 55% share of global equity, the co-authors estimate. By contrast, developed markets could rise to $66 trillion, or a 45% share of global equity.
They estimate that the overall global equity market would rise to $146 trillion by 2030, compared to its present value of $44 trillion — 69%, or $30 trillion, from developed markets and 31%, or $14 trillion, from emerging markets.
That rise in emerging markets would amount to a 9.3% compound annual growth rate through 2030, compared to an expectation of a 4% growth for developed markets equity, Messrs. Moe, Maasry and Tang wrote in the report. By contrast, over the past 20 years, emerging markets equity has grown at a 15.9% compound annual growth rate and developed markets at 6.5%.
China might surpass the U.S. in equity market capitalization terms by 2030 and become the single largest equity market in the world. China’s market cap of mainland- and Hong Kong-listed equities could rise to $41 trillion, or a 28% share of global equity, by 2030 from $5 trillion, or a 11% share, now.
By comparison, the U.S. equity market could rise more slowly to $34 trillion, or a 23% share of global equity, in 20 years from $14 trillion, or a 32% share, now, they write.
Emerging markets equities “offer investors attractive potential returns, but will require a greater allocation of business resources,” the report said. “Financial intermediaries have substantial revenue opportunities, but will need to localize further; operating costs and competitive pressures will rise.”
