2 key considerations for emerging market investments


Garrett Melson, CFA, Portfolio Strategist – Natixis

Hong Kong skyline at sunrise

 

Key Points

  • Emerging markets may offer compelling investment opportunities in a diversified portfolio.
  • A risk for these markets includes the impact of low interest rates on currency performance.
  • Investors who seek to capitalize on emerging markets must consider country and sector exposure.

Emerging market (EM) economies have not been exempt from COVID-19 economic challenges. However, they entered the pandemic with relative strength, which has helped boost their resiliency. Knowing what to watch for across the EM landscape can help inform the conversations you could have with your financial advisor.

 

EM growth drivers

Unprecedented levels of monetary accommodation from central banks — in emerging and developed economies — has further supported EMs. Although EMs have less access to massive fiscal spending programs compared to advanced economies, exposure to global trade helps support a stronger EM growth outlook (figure 1) and relatively stronger fiscal health (figure 2).

 

Figure 1 (Bloomberg)

Emerging market growth outlook

 

Figure 2 (IMF)

Government debt projection graph

Past performance is not a guarantee of future results.

 

Globally, goods consumption levels have recovered. Service industries, however, are struggling. COVID-19 fears and mitigation policies continue to limit a full return to the normalcy upon which many service sectors rely.

This has greater impact among developed economies, in which service industries are dominant. In the United States, for example, service represents nearly 80% of gross domestic product (GDP).1 Among EM economies, however, there is less impact. China, for example, is heavily reliant on manufacturing and agriculture — those two activities alone drive nearly 47% of GDP. 1  

 

Weighing EM investment risks

There are reasons to be optimistic about emerging markets prospects, but investments within these regions are not without risk.

Historically, currency exposure plays an important role in total returns for emerging market equity and debt investments. But lower interest rates — the result of massive monetary easing — have made investment in these currencies less attractive. This weighs on EM currency performance.

Signs continue to point to a recovery in global growth, which supports the EM domestic recovery outlook. However, it also leaves these economies vulnerable to COVID-19 infection trends and the re-opening setbacks other countries face.

 

2 key considerations for EM investors: country and sector

Investors who seek to capitalize on emerging markets must consider two key factors: country and sector exposure.

China represents over 40% of EM equity indices, while Taiwan and South Korea account for an additional 12% and 11.5%, respectively.2 Strong policy support within these countries helped stimulate a robust recovery, creating attractive opportunities.

In addition, the Information Technology, Telecommunication Services and Consumer Discretionary sectors represent over 50% of EM equity indices. These sectors have seen demand for their products rise steeply, as COVID-19 conditions have accelerated consumers’ reliance on technology and e-commerce.

Some countries and sectors within the EM indices will face headwinds moving forward. But China and the Information Technology and Telecommunication Services sectors are likely to continue to weather the pandemic crisis. Should the global recovery continue to gain momentum, emerging markets are likely to benefit and draw investors to this under-owned asset class.

 

A potential opportunity for growth

Depending on your financial goals and long-term investment strategy, EM equities may offer a compelling opportunity to consider. EM equities could help you capitalize on the continued tech dominance and benefit from a further recovery in global growth.

If you are interested in EM investments, contact your Ameriprise financial advisor. They will guide you to appropriate solutions for your financial goals, portfolio allocations, time horizon and risk tolerance.

 

Sources:

1 FactSet as of 11/9/20. FactSet is an independent investment research management company that compiles and provides financial data and analytics to firms and investment professionals.

2 MSCI as of 11/9/20