Given recent price and economic momentum, we are reasonably confident the bear market in
EM assets — five years long for EM equities and currencies, and three years long for EM local currency bonds — came to an end in January 2016, and the early stages of a bull market look to be well underway.
In fact, the current elevated slowdown probabilities of these nations, and the uncertainty they encapsulate, likely explain why
EM assets remain so attractively priced today.
For instance, over the 24 months through 31 January 2018,
EM assets delivered cumulative returns of 78.11 % for equities, 31.88 % for local bonds and 20.21 % for currencies (as proxied by the MSCI EM index for equities, JPMorgan GBI - EM Global Diversified Composite (Unhedged) index for local debt and JPMorgan ELMI + Composite for currencies).
Anti-trade measures could put pressures on
EM assets, particularly in places like Mexico that are considerably exposed to U.S. trade.
Risks to
EM assets have increased since the U.S. election.
That should remain a positive for
EM assets and risk assets, even if the sailing is unlikely to be as smooth ahead.
China's recovery also coincided with a near perfect set - up for
EM assets: a weaker U.S. dollar, falling bond yields, rising commodity prices and a more synchronized global expansion.
Rather, it has been one of the best performing fixed income sectors of the year and has outperformed other
EM assets, according to data accessible via Bloomberg.
For reasons discussed in our latest Multi Asset Snapshot (
EM assets still at risk — don't catch the falling knife), we see no early end to EM asset de-rating.
Over 2017, we saw sizeable capital flows into
EM assets, with approximately $ 80bn going into EM equities and $ 110bn going into EM fixed income4.
Regional or country specialisation is less common (less than 47 % of global
EM assets).
Increased trade frictions would also intensity the risk to our outlook for China and
EM assets in general.
EM assets are starting to look cheap, but it's too soon to grasp this particular nettle, as I wrote the other week in «Emerging market equities: close but no cigar `.
Among
EM assets, we also like EM bonds, particularly those denominated in hard currency, for their balance between risk and return.
As shown in the chart below, signs of economic stabilization in China combined with recovering commodity prices and a weaker U.S. dollar created short - term tailwinds for
EM assets.
The question is whether the current empirical evidence would still suggest there is a significant benefit to including
EM assets in a globally diversified portfolio.
Three key headwinds for
EM assets have abated lately, with a weakening U.S. dollar, a rebound in commodity prices and a recovering Chinese economy.
Anti-trade measures could put pressures on
EM assets, particularly in places like Mexico that are considerably exposed to U.S. trade.
However, while we are in the sweet spot, we do see selected opportunities among
EM assets that investors may want to consider, including in EM local - currency debt and certain equity markets.
BlackRock's Global Chief Investment Strategist Richard Turnill explains why we are in a near - term sweet spot for
EM assets.
Join the GSAM workshop to explore EM through a multi-asset lens; looking at investment techniques for allocating across the spectrum of
EM asset classes, as well as sharing our views on the most attractive opportunities for generating capital growth and income.
Given that many U.S. investors are underweight EMs in their equity portfolios, a renewed interest in this part of the world could be a potential tailwind for
the EM asset class (source: Bloomberg, as of 1/22/15).
Still,
the EM asset class remains an important component of a diversified portfolio.
Given that many U.S. investors are underweight EMs in their equity portfolios, a renewed interest in this part of the world could be a potential tailwind for
the EM asset class (source: Bloomberg, as of 1/22/15).
Additionally, the authors note their belief that within
the EM asset class, following a disciplined multi-manager strategy is the best way to serve participants» retirement needs and is a recommended best practice.
It provides full coverage of
the EM asset class with representative countries, investable instruments (sovereign and quasi-sovereign), and transparent rules.
I will moon walk down the m50 dressed in a Barney the dinosaur outfit if
an EM asset manager with $ 300mn AUM pays out a dividend with a rising $ and US 10 year yield given external $ EM debt.
Not exact matches
Once a niche
asset,
EM equity funds have steadily evolved to include different areas of focus and accommodate various investment styles.
Moderate Growth and Income Four
Asset Group model portfolio without private capital: 3 % Bloomberg Barclays 1 — 3 Month Treasury Bill Index, 11 % Bloomberg Barclays U.S. Aggregate Bond Index (5 — 7Y), 6 % Bloomberg Barclays U.S. Aggregate Bond Index (10 + Y), 6 % Bloomberg Barclays U.S. Corporate High Yield Bond Index, 3 % JPM GBI Global ex. - U.S. Index, 5 % JPM EMBI Global Index, 20 % S&P 500 Index, 8 % Russell Midcap ® Index, 6 % Russell 2000 ® Index, 5 % MSCI EAFE Index (USD), 5 % MSCI
EM Index (USD), 5 % FTSE EPRA / NAREIT Developed Index, 2 % Bloomberg Commodity Index, 3 % HFRI Relative Value Index, 6 % HFRI Macro Index, 4 % HFRI Event - Driven Index, 2 % HFRI Equity Hedge Index.
Emerging market (
EM)
assets are typically vulnerable to Fed rate hikes.
And reserve and other foreign
asset holdings have grown so large that
EM investment preferences have come to be seen as an important factor influencing global yields and valuations.
Last week,
EM equity exchange traded funds garnered $ 1.2 billion in investor
assets, according to BlackRock data.
Higher - yielding risk
assets such as local emerging market (
EM) bonds look relatively attractive.
Emerging market
assets are bouncing back after years of underperformance, but we think selectivity is still key to
EM investing.
Somewhat surprisingly, after years of lethargy, emerging market (
EM)
assets have performed strongly since.
The bottom line: Investors are being offered better returns for taking risk in the low - return landscape, and a portfolio allocation to a broader, diversified mix of
assets — including alternatives, global equities and emerging market (
EM)
assets — can potentially help improve returns, in our view.
2008 global financial crisis, world HNW and MC's, flooded back into US, driving USD strength, flatlined global economy, decelrating trade, collapse of commodity values, reduction in opportunity horizon of Manufacturing and Productive
EM, along with debt dynamics in China accelerating (Money Printing,
Asset Bloat) and staid developed world horizons and Equity bloat in US.
Other left - tail risks to our view include geopolitical disruptions, possible U.S. dollar strength or a complete breakdown in NAFTA negotiations that could dampen near - term sentiment for emerging markets (
EM)
assets.
We define the reflation trade as favoring
assets likely to benefit from rising growth and inflation, such as cyclical equities and emerging markets (
EM), while limiting exposure to long - term government bonds.
Many BlackRock fund managers have raised their emerging market (
EM) allocations lately, and we've warmed up in general to the
asset class after a long underweight.
Does the addition of a new uncertainty — possible further yuan depreciation — usher in another leg down for already challenged emerging market (
EM)
assets?
The main takeaway from all of this: Investors should be cognizant that
EM is no longer a homogenous
asset class, and each market faces its own challenges.
A Fed on hold and weaker dollar are good news for the
asset class (see the chart below), and there are signs of progress on structural reforms in certain
EM countries.
This would likely have knock - on effects on other
EM currencies and
asset prices.
Goldman Sachs
Asset Management (GSAM) continues to experience strong private client demand for emerging market (
EM) multi-
asset strategies as investors...
But while broad exposure to the
asset class can help diversify risk, it's also important to remember that
EM stocks aren't a homogenous
asset class.
The largest ETF is iShares J.P. Morgan
EM Corporate Bond ETF (CEMB) by iShares with $ 88.14 M in
assets.
At this workshop, we will discuss the application of smart beta and factor investing strategies in China A-shares, how it is relevant for
EM and global managers seeking access tools for portfolio completion, and how
asset owners can utilize different smart beta strategies for China A allocation based on their views.
Finally, while I had modest expectations for emerging market (
EM)
assets, I certainly missed the latest meltdown in
EM currencies, many of which have been depreciating faster than during the financial crisis.
Plunging oil prices were a major market and economic shock in 2015 and early 2016, causing broad market volatility while adding to the pain in emerging market (
EM) and high yield
assets.