The case for investing in emerging markets

Emerging markets are characterized by a high degree of dispersion – in the level of development, the institutional framework, economic policy, level of reliance on natural resources and political culture. This heterogeneity creates a fertile environment for active management.

Index-only approaches often underperform over the long term, hampered by withholding taxes, limited liquidity, or the inability to capture inflection points in local cycles. Active management, on the other hand, makes it possible to balance interest rate and currency risks in a targeted manner, to identify countries with recovery potential and to avoid those that are on the threshold of crisis.

Investors remain underweight many of the world’s most innovative economies. As a result they are missing direct exposure to some of the best value and growth companies.

Volatility, which has traditionally been a weakness of emerging markets, is now the same as developed markets, while valuation metrics show emerging markets still trading at a discount to comparable developed market assets. We think the risk/reward balance has shifted considerably as US trade and foreign policy signals an end to the rules-based era. We are convinced that countries committed to innovation and with lower debt will be key beneficiaries of this new global order.

Past performance is not a guarantee of future results. The value of your investments can go down as well as up. Capital is at risk. There can be no assurance that any investment objectives will be achieved.

Emerging markets are taking a bigger share of global exports with regions like Asia, Latin America, and the Middle East creating global value chains in industries that were previously dominated in the US and Europe. This is also reflected in a higher trend rate of GDP growth in EM economies as the multiplier effects of increasing trade and growing wealth begin to manifest.