Key insights

  • Global emerging markets have provided very strong returns for long term investors.
  • However, investors have to be prepared to accept higher volatility over shorter periods of 3 years and less.
  • Significant performance dispersions across regions, countries, sectors and styles factors provide substantial opportunities for active managers.
  • Smart-beta factor strategies have delivered mixed results – while Minimum Volatility and Sustainability factor indices have delivered strong results, traditional factor indices such as Value and Growth have disappointed.
  • The level volatility and dispersion of risk factor across major countries continue to rise, reflecting greater geopolitical risks and country level policy risks.
  • Despite the rising volatility (since 2017) of EM asset class, the correlations between BRICS constituents continue to diverge.

Emerging Markets can be a source of strong returns over the long term.

Over the long term, emerging markets (EM) can be an attractive source of uncorrelated returns for investors. The total return chart (Exhibit 1) since 2005 shows EM has outperformed DM, World and Frontier markets by a notable margin. Investments in EM (unhedged) grew at an annual compound rate of 8.44% in comparison to a Developed Market (DM) average of 7.31% p.a since 2005. However, it should be noted that most of this growth differential comes from the previous decade and the volatility of returns has been much higher in the most recent decade, particularly relative to the DM markets. In order to realise the long-term benefits of the asset class, investors need to take a long-term perspective and be prepared to withstand material drawdown over the shorter periods of less than 3 years.

Exhibit 1: Investors with long term investment horizon can gain from investing in EM

Picture1-2 Elevated dispersion and volatility due to rising geopolitical and policy risks make a strong case for active management in Emerging Markets


Check complete report here.