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Emerging markets: From niche
to necessity

BlackRock |Jun 16, 2017

Executive summary

Antoine Van Agtmael first coined the term “emerging markets” 36 years ago – a catch-all concept that pooled together a diverse and heterogeneous group of countries. The term is still used today as shorthand to group countries that have varied levels of economic development, growth drivers and political risk. Such simple categorization may be leading some investors to think about emerging markets (EM) in a way that does not necessarily reflect the dynamic nature of EM assets.

To help investors navigate the shifting role of EM assets – from a niche exposure to a core portfolio holding – we have authored this guide, which covers:

    • Becoming mainstream
      Return and yield potential, diversification benefits, improving fundamentals, and greater accessibility have all played a role in making EM debt and equity core allocations – particularly for cross border institutional investors.
    • Revisiting long-held beliefs
      Despite the growth of EM investing, many investors carry some assumptions about EM assets that may no longer hold: EM risk is singular and static, currency makes EM investing too risky, EM indexes are heavily-tilted to commodities and EM no longer offers diversification. We revisit these assumptions in the paper.
    • Benchmark evolution
      EM bond and equity indexes have evolved significantly over the years, but changes set for the future have the potential to dwarf anything seen over the last decade: the potential inclusion of China A-shares, Saudi Arabia and China local debt entering major EM indexes, the potential reclassification of South Korea from EM to developed market (DM), and Saudi Arabia’s privatization program. New ways of accessing EM are under way as well: GDP-weighted indexes and factor indexes offer innovative approaches for EM index investors; China may become a standalone asset class in both equities and fixed income.

Becoming mainstream

A growing market and investor base

EM assets have been growing at a remarkable pace (see Emerging exponentially). Over the last few decades, investing in EM debt and equity indexes has been increasingly embraced by investors as evidenced in the growth of Exchange Traded Products (ETPs) and other investment vehicles giving exposure to EM assets. Initially, allocations came from institutions and were later joined by retail – although the flows from the latter have largely gone hand in hand with market performance, with strategic retail allocations to EM remaining relatively small. More recently, we have also seen a rise in the domestic investor base1.

Emerging exponentially
Growth of EM index market capitalization, 1992–2016

Chart: Emerging exponentially

Sources: JP Morgan, BofA Merrill Lynch, MSCI, as at December 2016. HC refers to “hard currency” – which refers to government debt issued in USD, represented by JP Morgan Emerging Markets Bond Index Global Diversified (EMBI GD). HC corporates refers to corporate debt issued in USD, represented by JP Morgan Corporate Emerging Markets Bond Index Broad Diversified (CEMBI Broad). LC sovereign refers to government debt issued in each country’s local currency, represented by JP Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM GD). LC corporates refers to corporate debt issued in the local currency of the entity, represented by BAML Diversified Local Emerging Markets Non-Sovereign Index (LOCL). LC inflation refers Barclays EM inflation linked government bond index. EM equities are represented by MSCI Emerging Markets Index.