Head of Global Banks at Aberdeen Standard Investments
Signs of strength
Emerging market economies have been generating interest as investors diversify portfolios for growth value and yield. Emerging markets have enjoyed a supportive economic backdrop, and as emerging economies grow, investors may see that translate in to steady long-term investment returns.
Emerging economies have come a long way in the past few years. Sovereign and corporate balance sheets are strong and financial institutions are more robust. While the risk of investing in emerging markets continue to be greater than that of developed markets, there are exciting opportunities to be had investing in emerging markets for the long term.
In 2018, the economic and fiscal health of a number of emerging-markets economies may remain healthy despite volatility earlier in the year. Growth in emerging economies is expected to hit 4.5% in 2018, according to the World Bank. In comparison, the World Bank reported that developed market growth rates are forecast to decline to 2.2% in 2018 from 2.3% in 2017. In aggregate, emerging markets are forecasted to be the largest contributors to global growth in 2018.
Emerging markets offer investors tremendous geographical diversification. Emerging market countries are not homogenous and may therefore not be viewed or treated as such. For instance, last year, Indonesia made solid economic progress. Returns in emerging markets were lifted by these and other successes, such as positive policy developments in Argentina and Brazil. However, overall returns were dampened by countries that faced significant economic headwinds, such as South Africa.
India continues to generate significant interest through a combination of fiscal reform and independent monetary policy. Investors have priced in a hike to 6.5% before the end of the year, according to a February 2018 Bloomberg poll. Factors, such as improving growth prospects and rising inflation could also influence the monetary policy outlook in 2018. Managers who understand the nuances of India are better positioned to take advantage of and find opportunities for investment.
India continues to generate significant interest through a combination of fiscal reform and independent monetary policy.
Each country is at a different stage of political, and economic development. We believe that active managers are better positioned to understand where the investment opportunities lie with the companies active in the EM world.
Diversification does not ensure a profit or protect against a loss in a declining market.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Image credit: Illustration Works / Alamy Stock Photo
A version of this article was originally published in Financial Advisor Magazine on March 16, 2018.