Global Allocation Insight

The growing case for emerging markets

Mar 15, 2018

A key indicator says EM is likely to rise

Like most asset classes today, emerging market stocks can’t really be described as cheap. They are trading close to their historical norm, both on an absolute basis and relative to developed markets. However, EM stocks can be described as having relatively attractive potential.

While investors have historically looked to relative valuations and U.S. dollar fluctuations as some indication of expected EM performance, overall, the best case for EM equities generally ties back to global growth. While global GDP is difficult to measure in real time, historically, the direction of industrial metal prices has been a reliable proxy given the positive correlation between the demand for these metals and global growth. Therefore, if emerging markets are a levered play on global growth, they should be more inclined to outperform developed markets when industrial commodities are rising. The chart below illustrates how the relative performance of EM versus DM equities moves very much in tandem with the S&P GSCI Industrials Metals Index.

EM stock outperformance has risen with industrial metals prices

Emerging market stocks have generally exhibited stronger outperformance versus developed market stocks when the industrial metals price index was increasing.

EM stock outperformance has risen with industrial metals prices

Source: Thomson Reuters Datastream, March 2018. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

The takeaway here is that industrial commodities are on the rise and, along with broader leading indicators, this suggests global growth should remain solid and is likely to accelerate from last year’s pace. Should this prove to be the case, there could be further upside potential for EM equities.  

Within the Global Allocation Fund, we remain focused on country-specific opportunities within emerging markets. In selecting EM equity investments, we focus on companies within countries that have strong balance-of-payments positions and high savings rates, such as South Korea and Taiwan. We look within sectors that could benefit from a shift to middle income demographics and the corollary shift to increasing consumption. Key beneficiaries include the consumer and healthcare sectors. 

Within fixed income, we have exposure to EM government and government-related bonds, both in local currency and U.S. dollar denominations, diversified across ten countries. The fund’s largest EM debt exposures are in Brazil and Poland given cyclical improvements in these countries, and Argentina due to continued improvements resulting from the nation’s reform program.

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Russ Koesterich
Portfolio Manager, Global Allocation
Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team within BlackRock's Multi-Asset Strategies Group. He ...
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