Viewpoint on emerging markets

Nov 22, 2016
By BlackRock

Emerging markets (EMs) have weathered some rough waters over the past three years, but the tide appears to be turning. BlackRock’s Gerardo Rodriguez discusses the potential opportunity.

Why did emerging market
performance struggle for so long?

EM equities had been the worst-performing asset class since the end of the financial crisis in 2010. The collapse in oil prices, prospects of tighter U.S. monetary policy and risk of a hard landing in China were significant headwinds. In 2016, several factors began to favor EMs.

What were some of those
favorable developments?

Chinese authorities surprised markets, providing monetary and fiscal stimulus to stabilize growth; oil prices rebounded; and the Federal Reserve signaled a gradual monetary policy tightening. The U.S. election brought some uncertainty, but long-term trends are encouraging.

What is the longer-term outlook?

EMs are home to large populations that are moving up the income curve and demanding more sophisticated products and services. This trend is largely independent of the evolution of developed markets. More than 75% of mobile phones are used by EM citizens, yet EMs only represent 10% of equity market capitalization. We see EMs’ future as a story of increased financial penetration, and we think faster growth and expanding opportunity is worth investors’ attention.

Why should investors consider EMs for their portfolios?

EMs come with a higher risk profile than developed market stocks. But they also can be powerful diversifiers when analyzed within the appropriate investment horizon. While correlations of emerging and developed market equities are relatively high over shorter time periods, the correlation drops when the time-frame is extended, reaching almost zero for five-year returns. This indicates that, over longer horizons, EM equities tend to be driven mainly by country and company fundamentals, rather than global factors, offering a potential diversification benefit.

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Gerardo Rodriguez
Portfolio Manager, Emerging Markets
Gerardo Rodriguez, Managing Director, is a Portfolio Manager for the Emerging Markets (EM) group. His responsibilities include the management of multi-asset ...