Insights

Posted on November 30, 2018

Three Things to Know About Emerging Markets

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Published by Taylor Financial Group

Emerging markets have been in the news quite a bit lately, with all kinds of speculation surrounding its volatility. Last week, our team sat in on a call with Goldman Sachs Asset Management (GSAM), which featured portfolio manager Katherine Bordlemay giving great insight regarding Goldman’s emerging markets outlook heading into next year. She hinted at inevitable short-term pain, but potential long-term gain. Read further to find out critical facts about emerging markets.

  1. What does Global Growth Uncertainty mean to an Investor?

Many people feel as though worldwide growth is slowing down, but there are plenty others out there that are optimistic. The primary driver of emerging markets is China, of course, as it is the second largest economy. With trade wars looming, it is no surprise that some investors are bearish on emerging markets. GSAM acknowledged the concerns on global growth but said that emerging markets are poised for a comeback, not a crisis. EM countries are much more stable now thanks to their macro fundamentals dramatically improving. For example, inflation rates have gone from 60% in the mid-90’s to about 4% today. In terms of bonds, higher rates are pushing bond prices lower, while emerging market yields are close to 7% with a strong cashflow, resulting in a good cushion for positive total returns. Although there is some uncertainty revolving around markets on a global scale, growth like this gives investors much needed hope for the long-term.

  1. Why Emerging Markets Continue to Make Sense

This year, emerging markets have been extremely volatile, losing close to 20% due to market corrections. Nevertheless, over the last two years, emerging markets have given investors better returns than the S&P 500 (but with a bumpier ride). This is because emerging markets are posting double-digit earnings growth, and as everybody knows, earnings remain the primary driver of equity over time. On top of that, the emerging market index has outperformed the S&P 500 by nearly 2% in total over the last 15 calendar years, according to Bordlemay. You might even think that owning emerging market shares during the financial crisis would have been brutal for investors. However, a balanced emerging market portfolio outperformed the S&P 500 by about 1% in 2008-09.

 

 

  1. Should I own Emerging Markets in 2019?

86% of the world’s millennials live in what would be considered an emerging market, fueling powerful growth possibilities in next decade. GSAM is forecasting an emerging market stock rally in 2019, as they offer the most upside, mainly due to the current major drawdown of Chinese stocks.

EM seems to be a successful diversifier in client portfolios, but as with any sort of investing, you shouldn’t try to time it. GSAM predicts that developing-nation shares will most likely return upwards of 10% in USD in 2019. To maximize gains, you should consider experienced active management rather than investing in the emerging market index.

 

The trade war does not benefit everybody. So, keep a close eye on the trade war chatter, and if it seems to be fizzling out, it may be your chance to get in on emerging market positions.

 

Disclosure: The views states in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

 

Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.

 

 

Sources:

 

https://www.gsam.com/content/gsam/global/en/market-insights/market-strategy/outlook/2018/2018-em-comeback-outlook.html

 

https://www.gsam.com/content/gsam/us/en/advisors/market-insights/gsam-connect/2018/em-short-term-pain-long-term-potential-gain.html

 

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