Risk and Reward in Emerging Markets

DJIA vs Emerging Market Index from WSJ

In discussions with clients and prospective clients, one question routinely comes up, regardless of market conditions:  “How much emerging markets should I have?” or some variation.

I thought this article by Gregory Zuckerman from the Wall Street Journal this morning did a good job of summarizing where these markets are performance-wise and how they stack up against developed markets like the US and Western Europe on several metrics.

From the WSJ:

“For years, shares and bonds from emerging markets made investors wary…That view is changing. Last year’s financial meltdown raised questions about the attractiveness of developed nations, which have been dealing with their own serious debt, currency and governance issues.”

Investment managers are now asking themselves:

“If developed markets and emerging markets both face the same or equal risks (heavy debt, weak currencies, poor corporate governance and high volatility), why not just go for the growth of emerging markets, which in theory, offers more return and growth potential?”

Here’s a quote from the piece that sums up the conventional wisdom on that higher return potential:

Daniel Arbess, manager of the Xerion Fund, a hedge fund, at Perella Weinberg Partners, says that “emerging markets are arguably the single most important avatar of investment opportunity for our generation. The demand for commodities to support the modernization and urbanization of these and other developing economies, and the demand for food and products by growing consumer classes, should continue to fuel opportunities for years to come.”

So how much emerging markets is enough emerging markets for a portfolio?  Of course, the answer is different for everyone and the variables are endless in terms of determining a set percentage.  It’s also important to point out to people that it’s not just how much you have invested in emerging markets, but the method or vehicle you use to get that exposure.  Different strategies will obviously yield greatly differing results, just like obtaining exposure to any other investing theme or sector.

The question about the distinction of markets that was raised by 2008 (are developed markets any safer than emerging markets?) will linger for quite a while longer as more investors go for the growth overseas despite what the answer may be.

Source:

Emerging Stock Markets Looking Better (WSJ)

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