Emerging markets are developing nations whose economies are becoming more engaged with global markets as they grow. Typically they are characterised by increasing market liquidity, trade volume and foreign inward investment. Examples are the so-called BRIC nations — Brazil, Russia, India and China — and the likes of Mexico, Pakistan and Saudi Arabia.
So, should investors seek exposure to emerging markets? Or ar they just too risky? And if you do invest, are you better off using an actively managed fund or a low-cost index tracker?
In this video presented by ROBIN POWELL, S&P Dow Jones Indices investment strategist SHERIFA ISSIFU explains what the data tell us.
RP: We live in a global economy, and yet many investors have very little exposure to large parts of it.
Most investors, in fact, are biased towards developed stock markets, and particularly towards companies in their own country.
SI: Investors are often heavily allocated to domestic equity. So for the US – heavily invested in US equity; for other international investors, they are invested in their own markets. And when they do have a global equity piece, it’s often that the focus is on US large-cap indices like the S&P500. So emerging markets and other opportunity sets are often overlooked.
RP: So-called home bias often has a negative impact on returns.
In the first two decades of this century, for example, emerging markets such as China and India have outperformed the likes of the US, the UK and mainland Europe.
SI: Over the past 20 years, we’ve seen our broad-based benchmark for emerging market equities – the S&P Emerging BMI – outperform its developed market counterpart. And China and India have been at the forefront of this, they’ve been two heavyweights of emerging markets. Even from an economic point of view, we’ve seen that they’ve had great GDP growth. More than the single digits, often in the double digits.
RP: One of the downsides with emerging markets is that they tend to be more volatile than developed markets. But you can reduce volatility through diversification.
SI: Within emerging markets, there have been risks historically. So we have seen some case studies of crises such as Argentina’s credit default and we’ve seen the textbook case of hyperinflation in Zimbabwe. But if you are invested in a broad way to emerging markets, your risk or your allocation to any single country will be quite small.
RP: It’s often suggested that investors in emerging markets are better off using actively managed funds. But the evidence shows that very few active funds outperform the sector index in the long run.
SI: Our SPIVA reports — which is S&P Index Versus Active — show unequivocally that indexing has worked for emerging markets. So over the last 20 years, 92 per cent of active equity managers have underperformed our broad market index, which is the S&P IFCI Composite.
RP: So, emerging markets are an opportunity that investors shouldn’t miss. The key is to diversify and focus on the long term.
MORE FROM S&PDJI
For more valuable insights from S&P Dow Jones Indices, you might like to read these other recent articles, or visit the Indexology blog:
© The Evidence-Based Investor MMXXI