Emerging market equities have lagged those of the United States for years. Now that the dollar is weakening and developing economies are expected to experience post-Covid 19 growth, some financial advisers are becoming bullish on this volatile sector.
When people think of emerging markets, China often comes to mind, but funds that invest in emerging markets often cast a wider net to include countries like Argentina, Brazil, Chile, Colombia, Mexico, Peru and India, among others.
The MSCI Emerging Markets Index, a widely used benchmark index, captures large and mid-cap stocks in 27 emerging market countries. This index, which had only experienced four positive years of annual performance since 2013, gained 18.4% in 2019 and 18.3% in 2020, after a difficult start to the year, largely due to the pandemic .
“We think this is a signal that investors think economic growth will be pretty good from here,” said Jason Blackwell, chief investment strategist at The Colony Group’s Atlanta office, an advisor in registered investment.
While there has been some acceleration in emerging markets, Blackwell predicts that there is still plenty of room to expand, in part because countries have not fully recovered from the economic shock induced by the pandemic. Once people get more comfortable with the idea of a takeover, spending is about to increase, he says. Another expected boon for emerging markets is that many central banks have pledged to keep rates low for the next several years. This means companies should have more leeway to invest in capital spending and infrastructure, he says.
Emerging markets are also attractive given research that shows their middle class populations are growing dramatically, says Daniel Milan, financial advisor and managing partner at Cornerstone Financial Services in Southfield, Michigan. opportunities in the emerging market investment landscape, ”he said.
Risks of emerging markets
Granted, emerging markets are more speculative and riskier than domestic stocks, so they’re not necessarily intended for ultra-conservative and timid investors. Advisors have different views on how much investors should invest in these holdings, but recommendations typically range from around 5% to around 15%, depending on factors such as the investor’s risk tolerance and other holdings. There are also active and passive options for investing in these markets.
“The longer you have a deadline, the more [your] risk appetite, emerging markets can be a great choice, ”said Brian Jass, advisor in the Vadnais Heights, Minnesota, office of Great Waters Financial. His company tends to take a more conservative approach, recommending aggressive investors place around 8% in emerging markets and more conservative investors around 5%, using index funds and exchange-traded funds to keep costs down. (Emerging market funds tend to have higher expense ratios than domestic or developed country funds.) Two funds at the top of their list are the DFA Emerging Markets Core Equity Portfolio, which buys a large and diverse group of securities associated with emerging markets; and the DFA Emerging Markets portfolio, which focuses on large companies in emerging markets.
“We believe the emerging markets asset class is a great investment and should be held in a broadly diversified portfolio,” said Jass.
In February 2020, Cornerstone Financial Services resumed recommending its clients to invest in emerging markets, after a hiatus due in part to their relative underperformance against the S&P 500. In January, the company increased its allocation to emerging markets and could start over. , depending on factors such as the political landscape and the dollar’s evolution over time, he says.
For clients who are in all-equity portfolios, the company recommends that around 12% be allocated to emerging markets. For clients who have a 60/40 split between stocks and bonds, his company recommends that about 8% of the portfolio be reserved for emerging markets.
While there are many options to choose from, Milan generally recommends that the allocation be split between two ETFs Schwab Emerging Markets Equity ETF and First Trust International Equity Opportunities ETF. He likes these funds because they have a strong focus on companies from China, India, Brazil, Russia, Indonesia, Mexico and Turkey, which are increasingly represented among Fortune companies. 500.
As they make investment decisions, Blackwell, who recommends that investors allocate 12% to 15% of their portfolios to emerging markets, cautions them not to overlook Latin America as a source of growth. Many advisors focus only on Asian opportunities. But if you think synchronized global growth is about to take off, Latin America is a pretty interesting place because the countries there have economies that are rich in natural resources. “Managers who invest in exclusively Asian strategies can leave money on the table,” he says.