Equities

The convergence question in the Emerging Markets

The idea of convergence is a powerful one for many emerging market investors. The idea that emerging countries will inevitably experience “catch-up” economic growth to developed markets is a key part of their appeal.

11/28/2018

Nicholas Field

Nicholas Field

Global Emerging Market Equity Strategist, Emerging Market Equities

The idea of convergence is a powerful one for many emerging market investors. The idea that emerging countries will inevitably experience “catch-up” economic growth to developed markets is a key part of their appeal.

We have written before about the tenuous link between economic growth and market performance1, but it is certainly a better backdrop for market performance to have years of strong growth, than not.

This note looks at convergence. What is it? Why should it happen in theory? Is it a sure thing? And what factors make it more likely or less likely in practice?

Convergence: the theory

The way we think about convergence has its origins in the Solow growth model proposed in 1956. This model of the economy suggests output depends on inputs of capital and labor, as well as a factor for technological advance, which represents the extra use a unit of labor can make of “better” capital. The output is used as consumption and savings. As the model assumes a closed single economy, hence no capital fl ows, the savings have to cover depreciation of the capital and new investments.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.