In this month's update, we look at the increasing benefits of a long-term strategic exposure to emerging markets.

These benefits include much faster economic and population growth (particularly for millennial consumers) and greater exposure than anywhere in developed markets to many 'new world' themes. Importantly, emerging market equities also bring diversification benefits, with a significantly below-average beta (or correlation) to other equity markets. This is a key strategic (and also tactical) advantage as we negotiate the later stages of this extended economic and market cycle.

Key points are:

  • We remain tactically overweight emerging market equities, suggesting an active portfolio weight between 5% and 8% for balanced and growth investors respectively. A number of the headwinds underpinning a 20% correction in 2018, including a strong US dollar and rising US interest rates, have tapered.
  •  The higher long-term return opportunity in both emerging market equities and bonds necessarily embodies higher year-to-year volatility and risk than developed markets. However, given many emerging market economies are driven by local developments, this can be managed by an appropriately diversified exposure.
  •  We prefer active management in emerging markets, where experienced managers can address the inefficiencies that can exist in less researched markets.