Emerging markets have performed strongly since the beginning of 2017, recording a 28% gain for EM equities and a 14% rise for EM local currency debt (performance in US dollar terms as of 30/09/2017, see Exhibit 1 for the recent performance of EM equities).Exhibit 1: Performance of the MSCI Emerging Market Equity index over the last six months (end of April to end of September 2017)
Is it now too late to allocate to emerging markets?
In my view, emerging markets still seem to offer attractive investment opportunities. Firstly, the depreciation of the US dollar (see Exhibit 2) has played an important role as the performance numbers quoted above are 'only' +16% for equities and +2% for local currency debt when expressed in euro terms. Additionally, valuations of EM equities and EM currencies have remained more attractive than those of other asset classes, notably US ones.
Exhibit 2: Depreciation of the US dollar (as per the DXY US dollar index) over the last six months (end of April to end of September 2017)
Several emerging countries are also engaged in monetary easing which should support the local bond markets and, to a lesser extent, equity markets. Their economic cycle is less mature than in many other countries and the resumption of international trade should benefit these countries. Finally, positioning in these markets among international investors remains well below the high point reached in 2008.
Apart from (geo)political factors, the main risk we see is that of an excessively sharp rise in US interest rates with, as a consequence, a significant appreciation of the US dollar. We are continuing to reinforce our investments in these markets and we are not hedging the currency exposure.
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Written on 18/10/2017
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
This article was originally published in Option Finance ©Option Finance