The world is struggling economically. In its latest World Economic Outlook, the International Monetary Fund (IMF) projected that the global economy would grow by about 3% this year. In early 2014, by contrast, it was projecting that global growth in 2015 would be almost 4%. Most of this decline was related to emerging markets.
In early 2014 the IMF was projecting that emerging economies would grow by 5.4% this year, but it now projects only 4% growth. The decline in its projection for developed economies (including the US) from 2.3% to 2% was much smaller. The dramatic deceleration in emerging economies is a large part of the reason why emerging market stocks have struggled so far this year.
Yet these disappointing statistics don’t necessarily mean you should avoid exposure to emerging market stocks in your portfolio. It’s important to remember that there’s only a very weak relationship between a country’s economic growth and its stock market performance. It’s well known that growth in many big emerging economies is slowing, so this information is likely already incorporated into stock prices. And some effects of sluggish economic growth—such as weaker currencies, lower inflation, and less wage pressure—could actually help some stocks.
The IMF’s projections show emerging market economies bouncing back to 4.5% growth next year and 5.3% growth by 2020, so they’re not completely dire. These projections of a quick rebound may prove too optimistic, particularly the IMF’s belief that China will be able to maintain a growth rate above 6%. But even if emerging economies continue to sag, it’s very possible that emerging market stocks could do well. Despite economic weakness, keeping a globally diversified portfolio is still a good idea.