The stock market capitalization of emerging markets is forecast to eclipse that of the U.S. and other developed markets in the coming years, according to Goldman Sachs Research.
Our economists project EMs' share of the global equity market will rise from around 27% currently to 35% in 2030, 47% in 2050, and 55% in 2075. India is expected to have the largest increase in global market cap share — from a little under 3% in 2022 to 8% in 2050, and 12% in 2075 — reflecting a favorable demographic outlook and rapid growth in GDP per capita, Goldman Sachs economists Kevin Daly and Tadas Gedminas write in the team’s report. China’s share will rise from 10% to 15% by 2050 but, amid a demographic-led slowdown in potential growth, it’s expected to then decline to around 13% by 2075, according to Goldman Sachs Research.
EM market capitalization is forecast to exceed the U.S. by the end of this decade. The U.S.’s share of global equity market capitalization is projected to fall from 42% in 2022, to 35% in 2030, to 27% in 2050, and 22% in 2075.
To project the growth of global capital markets, our economists built on their forecasts for long-term economic expansion. They found that, although real GDP growth has slowed in both developed and emerging economies in the past 10 to 15 years, income convergence between emerging and developed economies remains intact, despite shocks in the global economy including the global financial crisis and the Covid pandemic. As incomes converge, that implies the share of global GDP accounted for by EMs will continue to rise over time: Their incomes will converge gradually towards developed economy levels, and the distribution of global income will shift towards this growing group of middle-income economies.
In 2050, the world's five largest economies will be China, the U.S., India, Indonesia, and Germany (with Indonesia displacing Brazil and Russia among the list of largest EMs over this horizon), according to forecasts from Goldman Sachs Research. China is expected to overtake the U.S. as the world’s largest economy around 2035. Looking out to 2075, the world's three largest economies are projected to be China, India, and the U.S., with India (just) overtaking the U.S. Interestingly, U.S. potential GDP growth is expected to be materially faster than China's at that point because of its better demographic outlook. With the right policies and institutions, today’s EMs are expected to make up seven of the world's top ten economies in 2075.
To project the size of the world’s capital markets, our economists’ analysis takes advantage of the fact that equity market capitalization-to-GDP ratios tend to increase with GDP per capita. Those metrics tend to be linked because richer countries typically have a greater share of their domestic company assets quoted on local stock exchanges (or equitization), and also because equity markets of richer countries tend to trade on higher earnings multiples than lower income economies.
Given the relationship between equity market capitalization ratios and GDP per capita levels, Goldman Sachs Research expects equity assets to grow more rapidly than GDP as EM income levels rise. Part of this increase is likely to come from rising valuation multiples. But our economists expect the main dynamic to be the equitization of corporate assets, the deepening of capital markets, and the disintermediation that takes place as financial development proceeds (in lower income economies, a relatively large share of companies tend to have a single owner with full control, whereas advanced economies have a greater proportion of exchange-quoted companies with thousands of shareholders). New issuance and privatizations are expected to be an important part of that process.
“One implication of faster-growing market capitalization relative to GDP is that the importance of EM equity is likely to increase significantly (albeit from relatively low levels),” Daly and Gedminas write. In 2022, EMs represented around 27% of total global market cap but around 45% of global GDP (measured in U.S. dollars). Over the course of the projections, Goldman Sachs Research expects EMs' share of global market cap will rise to around 35% by 2030 (50% for GDP), to 47% by 2050 (60% for GDP), and to 55% by 2075 (68% for GDP).
As EMs account for a great share of global market capitalization, that shift is projected to come at the expense of declining share for DM economies. The biggest increase in share of global market cap is forecast to come from India as the country’s share rises from around 2.5-3% in 2022 to 12% by 2075. Likewise, our economists project the rest of EMs' share to rise, from about 13.5% in 2022 to 30% in 2075.
Goldman Sachs Research also examined forecasted shifts in market share within the DM and EM categories. In advanced economies, our economists expect, most notably, for the U.S. to decline from 60%, but stay at a relatively high share of around 50%. By contrast, both Japan and the euro area are expected to decline at the expense of other DM economies (such as Canada and Australia, among others, reflecting faster potential growth in the latter).
And within EMs, the biggest change is projected to take place between China and India, the two largest EM economies: Our economists expect China’s relative EM share to decline from 40% in 2022 to about 30% in 2050, whereas India's is projected to rise from 12% in 2022 to around 17% in 2050. This relative shift from China to India reflects India's stronger demographic outlook and a more rapid pace of GDP per capita growth (from lower levels).
If market cap in EMs is growing faster than in DMs, does that mean those markets will also outperform today’s advanced economies? Not necessarily. Daly and Gedminas expect the equitization of corporate assets to be the major driver of the shift in global market cap. “This does not have a clear implication for the performance of equities themselves,” they write. That said, our economists expect EM equities to outperform DM stocks in the longer run because of stronger long-run earnings growth and valuation multiple expansion as risk premia fall.
Of course, it’s no sure thing that capital markets in emerging countries will develop so successfully. “Of the many risks to our economic projections, we identified rising protectionism and climate change as the most important long-term risks,” Daly and Gedminas write. “We view the first as the more important risk to the growth of capital markets — specifically, the risk that populist nationalism leads to increased protectionism and a reversal of globalization.”
Developing open capital markets is especially exposed to those risks because they depend on the ability and willingness of investors to commit capital to foreign jurisdictions. So far, the rise of populist nationalism has led to a slowdown rather than a reversal of globalization, according to our economists. The development of deep equity markets also requires a commitment from domestic policymakers to follow a mix of capital-market-friendly policies that encourage things like innovation, transparency, listing, and protection of private property rights.
Finally, our economists say generative artificial intelligence is another important risk to their projections. Because it’s likely to raise global productivity and GDP per capita levels, they suggest the innovation is an upside risk to the development of global capital markets. However, as the effects appear likely to be larger in DM than EM economies, this implies that it poses a downside risk to the projected increase in EMs’ share of global equity market capitalization.
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