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Perspectives

Emerging risks and opportunities

By Parul Gupta, Global Head of Strategic Asset Allocation

February 2, 2016

Today’s turmoil may create tomorrow’s opportunity. That’s a key message of ‘Navigating emerging markets’, one of our investment themes for 2016. Emerging markets (EM) have been in turmoil for some time now, with the MSCI Emerging Market Index dropping by as much as 36% in the last twelve months alone.

This has left EM equities looking lowly valued. Low valuations have generally tended to be followed by high returns, and high valuations by low returns. So, what might the future hold for EM equities?

Our own strategic asset allocation methodology estimates that EM equities could potentially return an annualized 10.4% over the coming decade. That’s well ahead of its estimate of 6% for developed market equities and also above the 7.3% EM equities returned over the last decade.

Of course, this doesn’t necessarily tell us anything about the near-term outlook. As our Global Chief Investment Strategist Steven Wieting points out, our long-term return estimate of 10.4% could easily rise further if EM equities suffer further deep falls in the next couple of years.

With the risk of further near-term falls, how might investors position themselves? Our Global Investment Committee (GIC) – which makes asset class recommendations based on the next 12 to 18 months’ outlook – has been tactically underweight EM equities in Latin America and Emerging Europe, but more positive on certain emerging regions and countries, especially in Asia.

You can read Navigating emerging markets in full here. And our latest long-term return estimates across various asset classes will appear here soon.

There may be additional risk associated with international investing, including foreign, economic, political, monetary and/or legal factors, changing currency exchange rates, foreign taxes, and differences in financial and accounting standards. These risks may be magnified in emerging markets. International investing may not be for everyone.

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