AllianceBernstein emerging markets portfolio manager Morgan Harting said investors should consider global events and potential volatility as they reallocate to emerging markets.
“In a year that included Russia’s invasion of Ukraine, renewed Middle East unrest, China’s slowing economy, the tapering of the US Federal Reserve’s bond buying, a drought in Brazil and elections in India and Indonesia, emerging market equities have returned a respectable 15 per cent,” said Mr Harting.
“[The] lesson: it pays to stay disciplined in the face of headline risks."
Mr Harting said emerging market index returns are likely to face greater headwinds in future, and allocations to emerging market equities will have to work harder to compensate for their far greater volatility.
“In our view, that means finding ways to generate meaningfully higher returns than the index or employing strategies to reduce volatility,” he said. “In either case, the bar is higher for passive index-tracking approaches than it is for active strategies, which have more room to manoeuvre."
Mr Harting also said there are ways for investors to tap into emerging market return potential while diversifying risk.
“Multi-asset strategies can generate equity-like returns with less volatility by broadening the investment opportunity set to encompass select emerging markets bonds,” he said.
“Investors should also consider adding exposure to smaller developing-world markets, many of which are growing quickly yet remain less correlated than the BRICs, and are often riper for stock-picking because of greater information inefficiencies.
“Ten years from now, we expect markets such as Vietnam, Nigeria, Colombia and Qatar to become more significant constituents in global portfolios,” Mr Harting said.
