These are sensational headlines designed to grab readers, but they (and others like them) nonetheless point to a global phenomenon that has gone largely unnoticed up until now—the “EM-ification” of DMs. Put simply, several of my colleagues and I share the view that many developed-market (DM) countries are beginning to resemble their emerging-market (EM) counterparts in some ways.
Does this mean that long-standing DM and EM classifications may eventually be no longer relevant? Will investors have to start analyzing DMs through an EM lens? Time will tell, but in the interim, we believe this nascent macro trend bears watching. Let’s look at the evidence, possible paths forward, and related investment risks and opportunities.
More Fragile DM Fundamentals
At a high level, it’s fair to say that economic and other fundamentals in DMs have become increasingly fragile over the past decade-plus. During that period, severe stress episodes such as the 2008 Global Financial Crisis (GFC) and the COVID-19 pandemic have spotlighted and, in some cases, accelerated this weakening of fundamentals in some countries.
For starters, many DM governments currently find themselves awash in debt. A variety of financial and political strains since the GFC has resulted in an unprecedented surge in government debt burdens. In fact, as a percentage of gross domestic product (GDP), aggregate DM debt has been climbing steadily since all the way back to the turn of the millennium, outpacing the rate at which EM debt has risen over the same period (FIGURE 1).
Long term, we see DM debt continuing to rise as social fissures—including income inequality—intensify political pressures to expand the social safety net in support of less fortunate citizens.