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Should Emerging Markets Play a Role in Your Portfolio?

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Summary

This article explores whether emerging markets should be included in an investor's portfolio. It looks at the past performance of emerging markets and argues that, despite their volatility, they can offer diversification and growth potential. It goes on to discuss the effects of the U.S. dollar on emerging markets, their current valuations, and their potential for growth. In conclusion, the article suggests that while emerging markets should be included in a diversified portfolio, investors should not deviate from the global market-cap weighting.

Q&As

What have been the returns of emerging markets compared to developed markets over the past 15 years?
The Morningstar Emerging Markets Index has generated annualized returns of just 3.1% per year, compared with 4.1% for the Morningstar DM xUS Index.

How has the performance of emerging markets and developed markets differed in the past?
Emerging markets generally produced higher returns than developed markets in the late 1980s and early 1990s, but fell behind in the mid-1990s and again in the tech correction in 2000.

What are the key factors to consider when evaluating emerging markets investments?
Key factors to consider when evaluating emerging markets investments include the strength of the US dollar, valuations, and growth potential.

What is the current relative valuation of emerging markets versus the US market?
The Morningstar Emerging Markets Index currently trades at about 11.4 times earnings for the trailing 12-month period, compared with a longer-term average of 13.5. Relative to the U.S. market, though, the P/E multiple is now 0.56, which is only slightly lower than the longer-term average of 0.59.

How much of the global economy and population are represented by emerging markets?
Emerging markets make up about 58.3% of global gross domestic product and 86.1% of the global population.

AI Comments

👍 This article provides an informative and balanced overview of the risks and potential rewards of investing in emerging markets.

👎 This article fails to address the potential for emerging markets to underperform in the long-term, leaving investors unprepared for any potential losses.

AI Discussion

Me: It's called "Should Emerging Markets Play a Role in Your Portfolio?". Basically, it looks at the pros and cons of investing in emerging markets, including their potential for growth, their higher levels of risk, and their low correlation with developed markets.

Friend: Interesting. So what implications does the article have?

Me: Well, the article suggests that emerging markets should be included in a diversified portfolio, but in moderation since they come with higher levels of risk. It also points out that investors should be aware of the potential for a prolonged period of weakness in the US dollar, which could have a negative impact on emerging markets. Additionally, the article suggests that investors should not deviate from the global market-cap weighting when investing in emerging markets, as this could be a risky bet.

Action items

Research the current economic and political climate of emerging markets to determine if they are a good fit for your portfolio.
Consider investing in a diversified portfolio that includes both U.S. and non-U.S. stocks, with a 20% stake in developed-market stocks and a 10% stake in emerging markets.
Monitor the U.S. dollar’s strength versus other major currencies to determine if it is having an impact on emerging markets.

Technical terms

Portfolio: A portfolio is a collection of investments, such as stocks, bonds, mutual funds, and other securities, owned by an individual or organization.
Emerging Markets: Emerging markets are countries that have lower levels of income per capita and are making the transition to become more developed.
MSCI Emerging Markets Index: The MSCI Emerging Markets Index is a stock market index that tracks the performance of stocks in emerging markets.
Rolling Three-Year Difference in Returns: Rolling three-year difference in returns is a measure of the difference in returns between two different investments over a three-year period.
Standard Deviation: Standard deviation is a measure of the variability of a set of data points.
Drawdown Risk: Drawdown risk is the risk of a portfolio or investment declining in value over a period of time.
Correlation Coefficient: The correlation coefficient is a measure of the strength of the linear relationship between two variables.
Price/Book: Price/book is a measure of the price of a stock relative to its book value.
Price/Sales: Price/sales is a measure of the price of a stock relative to its sales.
Price/Earnings: Price/earnings is a measure of the price of a stock relative to its earnings.
Gross Domestic Product (GDP): Gross domestic product (GDP) is the total value of goods and services produced in a country in a given year.