EM expected to outperform - some considerations

Emerging market equities are expected to be the top performing asset class over the next five years, according to a study by Robeco, which is a global leading investment manager.

Elsewhere in this year's report, developed market equities and commodities were forecast to return 4% each, high yield - the second best performing fixed income asset class - was expected to gain 1.5%, and investment grade credit was predicted to return 1%.

At the bottom of the table (see below), German government bonds were projected to be the worst performing asset class with average annual losses of 1.25%.

The only other asset class Robeco expected to report a loss was developed global government bonds, which it predicted to lose 0.25%.

In the same report, Robeco continues to say that Emerging markets returns are not immune to concerns over the interest rate environment in the US, weak fundamentals and trade war fears. It goes without saying that returns from these markets can fluctuate a lot from one year to another. As an example, the MSCI Emerging Markets index (EUR) generated 26% return in 2017 whilst this year is down 4%. During the financial crises back in 2008, the index lost 51% whilst the year after made 73%.

What are Emerging Markets?

This is an investment category which involves investing in countries outside the developed world and include countries like China, India, South Africa, Russia, Brazil and others. These markets offer good investment opportunities since the respective economies and sectors have large potential for growth as they are still developing however will involve a complex degree of risk due to higher political, economic and foreign exchange rate risk

Bottom line

Just by looking at the return numbers in Emerging Markets we can easily understand the importance of having a diversified investment strategy. By diversifying in various asset classes and geographical regions, we would achieve a better risk/return trade-off and thus making sure we are not exposed to a given region or asset in a particular point in time. This will ultimately provide us with peace of mind when investing the majority of our wealth.


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