A recent report from Goldman Sachs predicts that by the end of the decade, emerging-market stock capitalization will exceed that of the United States. The growth is attributed to increased access to public exchanges globally and rising incomes in emerging markets.
Goldman Sachs analysts converted economic growth projections into estimates of equity market capitalization. They concluded that the US's global share will fall from 42% in 2022 to approximately 35% in 2030. At the same time, emerging markets' share will rise from around 27% to 35% and continue to grow.
Despite recent slowdowns in real GDP growth in both developed and emerging economies, income convergence has continued to climb due to favorable demographics and productivity increases. The global economy faced many shocks, including the global financial crisis and COVID-19 pandemic.
Goldman Sachs cited the equitization of corporate assets, deepening of capital markets, and financial development-related disintermediation as crucial factors underlying the projected growth in emerging-market capital markets.
According to the report, emerging markets represented around 27% of total global market cap, compared with around 45% of global GDP measured in dollars. Nonetheless, developing economies are projected to grow at a rate of 3.8%, more than double the 1.8% forecast for advanced nations. This is attributed to more favorable demographics and increases in productivity over the remainder of the decade.
The authors of the report acknowledged that this trend does not necessarily imply better performance for equities. However, they anticipate that emerging-market equities will outperform developed-market stocks in the long run due to stronger long-term earnings growth and valuation multiple expansion as risk premiums fall.
Goldman Sachs's projections align with suggestions from other Wall Street firms, such as Morgan Stanley Investment Management and AQR Capital Management LLC, to reduce exposure to US equities and increase investment in emerging markets.
Despite extended underperformance by EM equities, the report forecasts significant growth. The MSCI emerging markets index has seen a gain of less than 4% this year, failing to match the pace of equity gains in the US, where the S&P 500 is up 14%, and the Nasdaq 100 has soared 38%. This has been exacerbated by a decade of underperformance when EM equities returned 10 percent compared to more than 100% for developed-market equities.
Goldman Sachs projects that India will experience the largest global market cap share increase, from under 3% in 2022 to 8% in 2050. In comparison, China's share is expected to rise from 10% to 15%. China should surpass the US as the world's largest economy around 2035, according to the report. By the middle of the century, the world's five largest economies will be China, the US, India, Indonesia, and Germany.