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Emerging markets: a world of opportunity

Katherine Renfrew
Portfolio Manager, Nuveen
Anupam Damani
Portfolio Manager, Nuveen
Barton Grenning
Managing Director, Portfolio Management
Horizon
Despite being investable asset classes for decades, emerging markets debt (EMD) and emerging markets equities (EME) remain poorly understood— and thus underrepresented in U.S. portfolios. Both EMD and EME offer a large, diverse array of opportunities. The EMD market, now valued at more than $22 trillion, includes government and corporate bonds issued in dozens of currencies. The EME universe has grown to just north of $6 trillion, or nearly 12% of the world’s total stock market capitalization, with thousands of companies in developing countries across the globe.

Executive summary
  • Emerging markets (EM) debt and equity assets tend to be under represented in U.S. investors’ portfolios. 
  • The long-term case for EM exposure remains strong. Strategic allocations to these assets may provide diversification benefits, enhanced return potential and compelling yield.
  • Even with heightened uncertainty about the U.S./China trade dispute, attractive EM investment opportunities are still available— but selectivity and active management are key.

 

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Endnotes

Sources

1 IMF World Economic Outlook database, April 2019.

2 Barnes, P. “Why Emerging Markets Have Better Demographics,” Market Realist, 6 December 2016.

3 Pezzini, M. “An emerging middle class,” OECD Yearbook 2012.

4 Kharas, H. and Hamel, K., Brookings Institute. “A global tipping point: Half the world is now middle class or wealthier,” 27 September 2018.

5 Source: JPMorgan.

6 Source: Bloomberg, L.P. GDP-weighted quarterly calculation encompassing 68 EM countries.

7 EM earnings were subsequently upgraded in early April 2019, but only by 0.2%.

8 Source: FactSet.

 

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

 

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

 

Glossary

A basis point is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001). Yield is the income return on an investment, such as the interest or dividends received from holding a particular security. Earnings per share (EPS) is the portion of a company’s profit allocated to each share of common stock. Earnings per share serve as an indicator of a company’s profitability. Option-adjusted spread (OAS) is the measurement of the spread of a fixed income security rate and the risk-free rate of return, which is adjusted to take into account an embedded option. Price/earnings ratio (P/E) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). JPMorgan Emerging Markets Bond Index Global Diversified limits the weights of those index countries with larger debt stocks by only including a specific portion of these countries’ eligible current face amounts of debt outstanding. MSCI Emerging Markets Index captures large and mid cap representation across 24 EM countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country. MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. The index covers approximately 85% of the U.S. free float-adjusted market capitalization. The MSCI World Index is a broad global equity index that represents large and mid-cap equity performance across 23 developed markets countries. It covers approximately 85% of the free float-adjusted market capitalization in each country. S&P 500® Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy.

 

A word on risk

All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk, and income risk. As interest rates rise, bond prices fall. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Investments in small and mid-cap companies are subject to greater volatility than those of larger companies. Investments in debt securities issued or guaranteed by governments or governmental entities are subject to the risk that an entity may delay or refuse to pay interest or principal on its sovereign debt because of cash flow problems, insufficient foreign reserves, or political or other considerations. In this event, there may be no legal process for collecting sovereign debts that a governmental entity has not repaid. Credit risk arises from an issuer’s ability to make interest and principal payments when due, as well as the prices of bonds declining when an issuer’s credit quality is expected to deteriorate. Interest rate risk occurs when interest rates rise causing bond prices to fall. Income could decline during periods of falling interest rates. Investments in below investment grade or high yield securities are subject to liquidity risk and heightened credit risk.

 

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

 

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