For the past 30 years, emerging markets have provided return enhancement and risk diversification opportunities for global equity investors. The opening of the domestic Chinese capital market and its integration into international markets is likely to have a transformative effect on the emerging markets equity segment and raises the prospect for investors of making dedicated allocations to China
The genesis of emerging markets as a distinct equity segment can be traced to the launch of the MSCI Emerging Markets Index in December 1987. Then, the index covered 10 countries, making up less than 1% of the global equity market, as reflected in the MSCI All Country World Index – now known as ACWI. Emerging markets have experienced dramatic growth and transformation over the subsequent three decades. As of January 31, 2019, the MSCI Emerging Markets Index comprised 24 countries, representing almost 12% of the MSCI ACWI.
The rationale for allocating to emerging markets rests on three pillars: superior economic growth has historically resulted in positive market returns; low correlation within emerging markets and across asset classes has provided diversification benefits; and a relative scarcity of information has created opportunities for active portfolio management. Long-term historical data confirms that emerging markets have provided positive long-term risk-adjusted excess returns and enhanced portfolio diversification. Their diversity has led to high cross-sectional return dispersion at both country and security level, creating opportunities to add value through active country allocation and stock selection. Omitting this equity segment would have introduced a performance drag on global indexed strategies and reduced the investment opportunity set of active strategies.
Recently, however, emerging markets have experienced volatile performance, driven by changes in monetary policy, increasing political uncertainty and deteriorating conditions for international trade.
Are these factors temporary or could they have a long-lasting impact? Will emerging markets remain a distinct equity segment, and will they continue to represent an essential portfolio allocation for international investors?
Download the white paper, The future of emerging markets: 30 years on from the launch of the MSCI Emerging Markets Index, to explore:
- The evolution of emerging markets
- Allocations to emerging markets
- Sources of risk and return in emerging markets
- China and the future of emerging markets.