Emerging Markets: Caution, Not Abstinence
by Russ Koesterich
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Global Chief Investment Strategist
In the space of three years, emerging markets (EM ) have gone from a key strategic asset class, one favored by many investors, to persona non grata. More than $10 billion flowed out of emerging market exchange traded funds (ET Fs) in 2013, a level already exceeded during the first two months of 2014.
While we share investors’ concerns on the near-term outlook for emerging market assets, we disagree with the notion that EM has gone from a strategic asset class to one that should be completely shunned.
Many investors are being scared off by the volatility in emerging markets, but it is important to note that recent volatility is not abnormal. The recent past is actually more representative of EM investing than the unusually placid period of the past several years, a period in which markets were unusually quiet due to unconventional monetary policy by the major central banks.
The reason investors have historically put up with this high volatility is that over long periods of time, EM stocks and bonds have benefited most portfolios. While EM assets are more volatile than those in developed markets—one of the main reasons EM allocations should be modest—they still provide some diversification and generally are additive in moderate or aggressive portfolios.
And while it is true that the short-term outlook for emerging markets does suggest further volatility, even today investors may want to consider targeted purchases. In particular, in a world in which low yields still prevail, we see relative value in EM dollar-denominated bonds. On the equity side, we see significant opportunities to differentiate among EM countries, sectors and stocks. As such, the current environment is one in which we see rich pickings for active managers with broad mandates.
Previous Market Perspectives
- Sitting on Cash (March 2014)
- The Price of Politics (February 2014)
- Wage Woes (December 2013)
- Playing Defense Market Perspectives (November 2013)
Russ Koesterich and Dan Morillo explore the tradeoffs involved in "Playing Defense." (November 2013)
- Case for Emerging Markets (October 2013)
Russ Koesterich takes a look and makes the long term case for emerging markets.(October 2013)
- Investing in a Rising Rate Environment (September 2013)
Russ Koesterich discusses, Investing in a Rising Rate Environment and what a potentially new investment landscape means for investors. (September 2013)
- What's Next in 2013? (Mid-Year Outlook)
Russ Koesterich, Jeff Rosenberg and Peter Hayes take a look at where we’ve been – and what we might expect for the remainder of the year in (Mid-Year Outlook)
- What does the US energy boom mean for the economy and investors? (July 2013)
Russ Koesterich describes what the US energy boom means for the economy and investors (July 2013)
- Are We In a Bubble? Where and How to Find Value in Today's Market (June 2013)
Russ Koesterich describes Where and How to Find Value in Today's Market (June 2013)
- The End of the consumer? What the long-term decline of consumption means for investors (May 2013)
Russ Koesterich describes what the long-term decline of consumption means for investors (May 2013)
- The Case for Emerging Market Bonds (April 2013)
Russ Koesterich explains why it can play a significant role in a portfolio. (April 2013)
- Living in a Zero-Rate World (March 2013)
The Impact of Fed Policy on the Economy and Inflation (March 2013)
- Breaking Bad Behaviors (February 2013)
Understanding Investing Biases and How to Overcome Them (February 2013)
- 2013 Outlook (January 2013)
Russ Koesterich discusse Three Scenarios for the Coming Year (January 2013)
- The Slow Mo Economy (December 2012)
Russ Koesterich discusse preparing for slow US growth over the long term.
- Europe at a Crossroads: The Outlook and Opportunities
Russ Koesterich discusses where the opportunities are - and how there is still much work to be done to address Europe's problems.