Is the Emerging Market Story Over? Don’t Bet On It!

by Anil K. Gupta & Haiyan Wang

One of the biggest questions for corporations and investors today is whether the emerging market (EM) story was just a flash in the pan, whether it’s over, and whether one should get back to the apparent safety and prosperity of the developed markets (DMs).

It’s obvious that EMs are facing severe headwinds. 2015 will be the fifth consecutive year of slowing economic growth in EMs. The days of break-neck growth in China are gone for good. The commodity super-cycle has come to an end. Global volatility – coupled with strength of the US economy – is making investors retreat to the safety of the US dollar. A direct result has been depreciation in emerging market currencies and capital flight from EMs. Since mid-2014, against the US dollar, the Brazilian Real is down 42%, the Russian Ruble 46%, the Malaysian Ringgit 26%, and the South African Rand 22%. 2015 will be the first year, since the 1980s, to see capital outflows from the EMs exceed capital inflows.

As in the case of the weather watcher, the casino gambler, or the Wall Street investor, it’s important to remember, however, that today’s events are not necessarily a good guide to longer-term trends. In analyzing the trajectory of EMs, it’s critical to look at the broader context in at least two ways. One, what’s happening in the broader global economy. Two, how the underlying structure of the emerging economies is changing.

Look first at developments in the broader global economy. While the US does remain very robust, the prospects for Europe and Japan, the other major developed markets, remain modest at best. Yes, commodity exporters such as Brazil, Russia and much of Africa are hurting. However, softer prices for oil and other commodities are a big boon to China and India – the world’s two biggest and fastest-growing EMs, and which account for almost 40% of the world’s population.

As IMF data tell us, what this means is that, even in 2015, EMs will grow at twice the pace of the DMs. Even after factoring in currency depreciations, the share of EMs in the global economy continues to rise year after year. In 2000, it stood at 21%. This year, it will be almost double – 40%. By 2020, it’ll be 44% and, by 2025, close to 50%. If you want growth, you have no choice but to stay engaged with EMs. If you run away from the EMs, where exactly will you run to? Mars!

The other major reason for longer-term optimism about EMs derives from major structural changes underway in EMs. As one might say, today’s EMs are not your father’s Third World any more.

The population is young. Africa is 10 years younger than the World average. India is nearly 20 years younger than Europe or Japan, and nearly 10 years younger than the U.S. Importantly, given the rapid diffusion of mobile and broadband connectivity, this young population is becoming more literate, better informed, more ambitious, and more entrepreneurial. It’s also more urban. The role of the State is way down and declining. Governance and infrastructure in EMs still leaves a lot to be desired. However, by every measure, on every continent on earth (including Sub-Saharan Africa), the quality of both governance and infrastructure is better than it was 10 years back and getting better.

Obviously, not every EM will make it. As with Greece among the developed economies, some EMs will get trapped and stay where they are. Others will move far too slowly. However, one must remain starkly clear that, in the aggregate, EMs will keep moving forward and, in ten years, account for half or more of the world economy. And, they’ll still be growing at 2-3x the pace of the DMs.

Given this analysis, we have a five-part advice for companies from the developed economies. First, make sure to defend your strengths in your home markets. You’ll need the cash flow and the technological strengths to play the EM game. Two, spread your bets across several of the bigger EMs. Three, bet on the long-term trends. Four, build deep, rather than shallow, knowledge of at least the major EMs. Last but not least, keep track of new competitors from EMs. They may well be bigger, more ambitious and faster-moving than you. They could also be worthy partners in winning the EM game.

Anil K. Gupta is the Michael Dingman Chair in Strategy, Globalization and Entrepreneurship at the University of Maryland’s Smith School of Business. Haiyan Wang is the managing partner, China India Institute. They are the coauthors of The Quest for Global Dominance, Getting China and India Right, and The Silk Road Rediscovered.

An earlier version of this article appeared in Harvard Business Review.