Emerging markets have become more structurally sound, following historical cyclical volatility, creating more opportunity for investors, according to asset manager Neuberger Berman.
The market shift towards more stability reflects migration to more traditional, core asset classes.
“This represents a one-time transformation of emerging market equities and debt that could provide a unique opportunity for investors who are underweight emerging market asset classes,” Neuberger Berman’s head of investment strategy and risk Alan Dorsey said.
“The basic strength of many countries in Asia, Latin America and Eastern Europe has rarely been so secularly robust as it is now, particularly in comparison to many developed countries.
“In my view, the final ‘hurdle’ to becoming a permanent part of investor portfolios would be for emerging market economies to put in place more consistent governance practices and, in those countries where it is still a problem, reduce fraud and corruption,” he said.
He explained that GDP growth, foreign exchange reserve accumulation, current account surpluses and a growing middle class are key factors driving the structural shift in emerging markets.
Robust fiscal and monetary policies and the stability of local institutions have also been instrumental in bringing about the market stability.
“The main implication of these drivers is that there is a structural reduction of risk in emerging market economies, not least through emerging market debt being upgraded to investment grade,” Mr Dorsey said.
“While risk hasn’t been eliminated entirely, we are seeing a situation where the risk levels of emerging markets are, in many cases, lower than they have been in the past, and potentially lower than those of many developed markets,” he said.
Although investors still need to weigh the risk and return of investments carefully, when compared to the developed markets, emerging markets are an increasingly attractive investment option.
“Investors who take advantage of this now are well placed to benefit from the ongoing growth and strength of the market,” he said.
