Is It Time To Embrace Emerging Markets

Includes: EEML
by: Russ Koesterich, CFA

With markets rallying and the developed world plagued by sovereign debt problems, many investors are wondering if they should overweight emerging markets.

In this video, I explain why it’s a good time to consider this trade. My main argument: Most of the factors that have historically supported emerging market returns relative to those of developed markets are present today.

So how should investors consider implementing this trade? I prefer overweighting Latin American and Asian emerging markets at the expense of emerging Europe, the Middle East and Africa (EMEA).

Emerging markets in Latin America and Asia are growing faster than those in Europe, which are more exposed to the European sovereign debt and banking crises and thus are cheap for a reason. In addition, companies in EMEA are on average less profitable than their competitors in Asia and Latin America.

This sample portfolio gives an example of how much of their regional exposure investors may want to consider allocating to each region.

(Click to enlarge)

My team constructed this portfolio using both return and risk expectations. Relative to the MSCI Emerging Market benchmark, this portfolio is significantly overweight Latin America (by 9%), slightly overweight emerging Asia (by 3%) and dramatically underweight EMEA (by -12%) [Potential iShares solutions: NASDAQGM: EEMA and NASDAQGM: (NASDAQ:EEML)].

Source: Bloomberg

Investors should discuss their own portfolio allocation with their advisors.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Past performance does not guarantee future results.

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