Most investors do not have a dedicated emerging markets equities allocation in their portfolio and they may be missing out. Emerging markets equities are a dynamic, ever-changing investment opportunity that come with unpredictable lows but also giddy highs which reward investors for taking on increased risk
Most investors do not have a dedicated emerging markets equities allocation in their portfolio and they may be missing out.
Emerging markets equities are a dynamic, ever-changing investment opportunity that come with unpredictable lows but also giddy highs which reward investors for taking on increased risk.
Emerging markets re-emerging
The investment rationale for emerging markets is compelling: emerging markets include economies which are growing faster than developed markets and include opportunities not available in developed markets.
Since 2001, emerging markets have outperformed developed markets, but it’s been a wild ride. Australian investors with global equity portfolios that had exposure to emerging market equities were rewarded in the lead up to the GFC (2001 to 2017 below) benefiting from the emerging markets boom. They then underperformed, prior to a stellar 2017. Since then, emerging markets have underperformed developed markets as the US dollar strengthened. However with at least one more US rate cut expected there is pressure on the US dollar. This bodes well for emerging markets.
Source: Morningstar Direct. Cumulative returns are calculated monthly and assume immediate reinvestment of all dividends. Data is in Australian dollars. You cannot invest in an index. Past performance is not a reliable indicator of future performance.
The investment case for growth in emerging market equities is compelling given their significant projected growth prospects as a result of increasing numbers of emerging markets consumers and the faster projected growth rates.
Source: Bloomberg, IMF, World economic database, end of 2018
Right now, emerging markets look compelling from a valuation standpoint.
Source MSCI, November 1999 to October 2019
The challenge with emerging markets
Investing in emerging markets has traditionally been expensive and returns among active managers vary significantly from year-to-year because it is almost impossible for active managers to time factors in emerging markets. Over the long term a multi-factor approach has exhibited significant outperformance.
Much of the growth in emerging markets over the past twenty years has been due to:
- A shift from commodity reliance to a broader economic base including technology and healthcare;
- The corporatisation of state-owned monopolies;
- Urbanisation; and
- The rise of local middle class consumers who are driving growth in education, entertainment, healthcare and travel.
Astute investors are including exposure to emerging markets to capture this growth opportunity as part of a well-diversified international portfolio strategy.Discover how you can invest in emerging markets with one trade on ASX.