Executive Summary
Despite recent signs of progress in Europe, most investors realize that large, developed markets (DM) have yet to address fully their
long-term structural issues: debt, deficits, deleveraging, and the accompanying slow growth. Many are naturally turning to emerging markets (EM) as a source of growth — and arguably even stability. Yet, despite their historical growth rates and newfound fiscal virtue, most EM equity markets remain volatile compared to their developed counterparts — albeit to a lesser extent than in the past. This leaves the question of how to best adjust exposure to emerging markets….
Russ Koesterich, Managing Director, iShares Chief Investment Strategist
Historically, emerging market returns relative to developed markets have been driven by four factors:
1. Economic Growth. Faster growth — both local and global — generally favors emerging markets over developed.
2. Investor Sentiment. Improving sentiment, even from low levels, supports emerging market relative performance.
3. Credit Conditions. Improving monetary liquidity, as measured by contracting credit spreads, has historically favored emerging markets.
4. Relative Valuation. Emerging markets traditionally perform best following periods when their valuations were at a significant discount to developed markets.
1. Economic Growth. Faster growth — both local and global — generally favors emerging markets over developed.
2. Investor Sentiment. Improving sentiment, even from low levels, supports emerging market relative performance.
3. Credit Conditions. Improving monetary liquidity, as measured by contracting credit spreads, has historically favored emerging markets.
4. Relative Valuation. Emerging markets traditionally perform best following periods when their valuations were at a significant discount to developed markets.
Currently, while global economic growth is likely to remain anemic, and potentially even decelerate in 2012, the other factors modestly favor emerging market equities. To the extent the situation in Europe does not degenerate into a full-blown crisis, even a modest improvement in
liquidity and sentiment would be supportive of EM stocks.
liquidity and sentiment would be supportive of EM stocks.
There are many ways to implement this trade, but we would favor using a regional or country allocation rather than a broad emerging market exposure. Specifically, we would monetize our EM positions in a manner that allows us to overweight Latin American and Asianemerging markets at the expense of emerging Europe.
Source: ETFWorld – iShares
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