Emerging markets may regain performance superiority over U.S. equities by 2025, emphasizing the importance of diversification in investment strategies.
Successful investment in emerging markets requires understanding local dynamics, including political climates and currency risks, to mitigate potential pitfalls.
Deep dives
Historical Performance of Emerging Markets
Emerging market equities showed a strong performance from 2002 to 2012, outperforming U.S. stocks by nearly 12% annually. However, from 2013 to 2022, U.S. stocks reversed this trend, leading to an 11% annualized outperformance. As investment climates shift, projections suggest that by 2025, emerging markets will regain an edge over U.S. equities once again. This cyclical nature of market performance indicates the potential value of diversifying investments into emerging markets, particularly as they may benefit from global economic changes.
The Importance of Local Insight
Investing in emerging markets requires a nuanced understanding of local dynamics, including political climates and currency considerations. The speaker emphasizes that a third of stock performance variance is linked to country-level factors, another third to industry-level aspects, and the remaining to company specifics. This understanding is crucial as successful investment hinges not just on identifying promising stocks but also on navigating potential pitfalls like currency fluctuations or regulatory challenges. The need for local advice and a pragmatic approach is underscored by comparing historical examples of failures due to ignorance of local conditions.
Diversification and Market Potential
Emerging markets offer valuable diversification benefits, especially as U.S. stocks become increasingly concentrated and correlated. The speaker notes that many foreign investors have extensive holdings in U.S. equities, creating a potential risk due to overexposure. Investing in emerging markets can provide exposure to asset classes that are less correlated with U.S. markets, allowing for a hedge against volatility. Furthermore, active management in emerging markets can yield alpha opportunities that are increasingly rare in developed markets.
Opportunities in Specific Markets
The conversation highlights potential opportunities in various specific emerging markets, such as Greece, Turkey, and Mexico. Greece has shown remarkable recovery post-financial crisis, while Turkey offers significant alpha potential due to its unique macroeconomic conditions. Mexico has been strategically engaging with the U.S. to bolster trade relations, representing a promising investment environment amidst ongoing negotiations. Each country presents distinct characteristics, allowing investors to tap into diverse economic growth narratives and strategies.
Ali Akay, CIO of Carrhae Capital, answers why invest in emerging markets. He also shares with Greg Dowling of FEG insights on China, Mexico, South Korea, Argentina, Greece, Turkey, South Korea, and South Africa.
