I’m hearing differing views on emerging markets. Should I be in or out?
Our take: In. But tread cautiously.
We’ll be the first to acknowledge that investing in emerging markets (EMs) entails risks (and requires a strong stomach to ride out the inevitable ups and downs). But EMs still have a place in investors’ portfolios, according to Jeff Shen, Head of Emerging Markets and Portfolio Manager of the BlackRock Emerging Market Allocation Portfolio. “Over the long term, emerging markets should benefit from stronger economic growth. EM stocks also have one thing going for them that’s tough to find today: They are relatively undervalued.”
Emerging markets certainly appear to have room to grow. While they account for most of the world’s population and are responsible for half of global gross domestic product, EM stocks make up only 10% of world market capitalization (see graph below). This suggests significant long-term growth potential.
But be prepared to do your homework. “Emerging markets can’t be thought of as a single asset class,” Mr. Shen explains. “There’s an incredibly diverse array of countries, economies and companies that make up the emerging world and some are much more attractive than others. Investing in EMs requires flexibility and differentiation.”
That’s why Mr. Shen suggests investors gain their EM exposure via actively managed strategies that have the ability to change tack quickly. He also cites the merits of thinking long term.
“Emerging markets shouldn’t be a short-term trade. Rather, you should seek out a strategy that can be nimble and flexible enough to capitalize on the quickly changing nature of emerging markets over the long haul.”