Chief Investment Officer, Senior Managing Director | 2018Emerging Market Equity Positioning
While the positive growth differential of EM in relation to Developed Markets (DM) is familiar, what is perhaps less well recognized is the divergence of potential opportunities between regions.
EXECUTIVE SUMMARY
The traditional long-term investment case for Emerging Markets (EM) is based on their superior growth dynamics and diversification benefits. While the positive growth differential of EM in relation to Developed Markets (DM) is familiar, what is perhaps less well recognized is the divergence of potential opportunities between regions. As EM economies shift from their export-dependent, commodity-intensive models of the past and move toward more sustainable, services-led domestic drivers of growth, these markets are becoming increasingly diverse and sophisticated.
EM is often viewed as a monolithic asset class by investors, who refer to the growth and risk considerations within EM broadly even though levels of economic and financial market development may vary significantly in some cases. While a common set of factors may affect the broad-based universe in certain situations, we believe it is crucial to understand the fundamental differences in countries and regions that ultimately drive potential growth and returns.
In this paper, we outline the forces at work behind the shift underway in emerging economies and examine the allocation considerations investors now need to take into account within a globally diversified portfolio. Our analysis is based on the latest data, supplemented by research from the international financial and academic community, and incorporates our proprietary 4-Ps multifactor framework:
POLICIES to support economic growth and prosperity;
A POPULATION that is younger and growing more rapidly with higher levels of productivity;
The POTENTIAL for greater innovation in industries of high intellectual property that generate above average secular growth and returns;
A superior PROFITABILITY profile of the publicly traded companies.
Given Asia’s rising economic importance and growing equity and fixed income markets, we conclude that the region presents a compelling opportunity for long-term investors searching for growth. The potential diversification benefits of EM Asia assets also underscore the investment case for including them as a core, strategic allocation in investor portfolios.
While the positive growth differential of EM in relation to Developed Markets (DM) is familiar, what is perhaps less well recognized is the divergence of potential opportunities between regions.
