Should you invest in emerging markets right now?
In general, investors are underweight in their emerging market (EM) allocations, and we feel this is an excellent time for a reassessment of that positioning, as the asset class looks poised for potential outperformance in 2024.
In general, investors are underweight in their emerging market (EM) allocations, and we feel this is an excellent time for a reassessment of that positioning, as the asset class looks poised for potential outperformance in 2024.
Growth. The biggest advantage of emerging market investments is the potential for high growth. Diversification. International investments can be a good diversifier for your investment portfolio because economic downturns in one country or region, including the U.S., can be offset by growth in another.
Emerging-market equities have a bad rap. But a lost decade may have set up promising conditions for a recovery. After a difficult year in 2023, we're seeing signs that a recovery may be brewing for emerging-market (EM) equities.
Vanguard's active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.
EM stocks are currently in one of their longest bear markets, with the MSCI Emerging Markets Index down about 40% from its February 2021 peak.
If a US recession is on the way would only make more of a case for greater diversification in global portfolios – a positive for emerging markets. A recession would entail lower inflation and, as a result, lower US interest rates.
By investing in emerging markets, you can potentially benefit from high growth rates and diversification. However, it's important to be aware of the risks, such as political instability and currency volatility, and to conduct thorough research before investing.
As of now, the MSCI India Index's price-to-earnings ratio (P/E) is trading at about one standard deviation above its 10-year average, based on the consensus earnings forecasts for 2024. Looking forward, the forecasted 17% growth in earnings for 2024 supports the current P/E ratio.
Emerging markets are distinguished from rich countries less by the nature of the challenges they face than by the magnitude, dynamism, complexity and urgency of those challenges and the relative scarcity of resources to deal with them.
How much should I invest in emerging markets?
In short, a review of the three standard approaches to EM allocation suggest global equity investors should allocate somewhere in the range of 13% to 39% to EM. Source: FactSet, MSCI, MSIM calculations.
Because emerging markets are viewed as being riskier, they have to issue bonds that pay higher interest rates. The increased debt burden further increases borrowing costs and strengthens the potential for bankruptcy. Still, this asset class has left much of its unstable past behind.
Emerging markets expand at fastest pace since June 2023
Brazil meanwhile saw private sector activity return to growth in January after stagnating over December. Russia and mainland China's growth rates moderated slightly from December, but continued to reflect solid and modest rates of improvement respectively.
Fitch Ratings-London-05 February 2024: Higher growth in emerging markets (EM) relative to developed markets and the prospect of US Federal Reserve rate cuts later this year are expected to push emerging-market net capital flows to a decade high in 2024, says Fitch Ratings in its latest Economics Dashboard.
| Stock | 2024 performance through Feb. 29 |
|---|---|
| Digital World Acquisition Corp. (DWAC) | 135.2% |
| Nature Wood Group Ltd. (NWGL) | 140.9% |
| Sana Biotechnology Inc. (SANA) | 146.1% |
| Super Micro Computer Inc. (SMCI) | 204.7% |
BRIC countries or Brazil, Russia, India and China. These countries are currently considered the top four emerging markets.
Even though the world economy at large has proven resilient, they point out that portfolio flows to emerging markets have experienced the most pronounced decline in more than a decade - driven mainly by outflows from Russia and China - and they have now been trending down for ten years.
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It becomes a bit more important to focus on top-quality companies in turbulent times, but, for the most part, you should approach investing in a recession in the same manner you would approach investing any other time. Buy high-quality companies or funds and hold on to them for as long as they stay that way.
Is the best time to invest during a recession?
The sharp declines in stock prices that occur during a crisis or recession may present good opportunities to invest. Some companies may be undervalued by the market. Others may have a business model that makes them more resilient to an economic downturn.
Brazil, Russia, India, China, and South Africa are the biggest emerging markets in the world.
The risks of investing in emerging market bonds include the standard risks that accompany all debt issues, such as the variables of the issuer's economic or financial performance and the ability of the issuer to meet payment obligations.
The ten largest emerging economies by nominal GDP are 5 of the 10 BRICS countries (Russia, Brazil, India, China, and Saudi Arabia) along with Indonesia, Mexico, Poland, South Korea, and Turkey.
From an investment perspective, one of the primary reasons for considering investing in emerging markets is gaining exposure to the strong economic growth they've historically generated and could generate into the future, in Fidelity's opinion.
