That old saw behind why people invest in emerging markets — more risk brings more reward — might need to be reworked.
As stocks in the developed world gyrate wildly on trade-war rhetoric, relative volatility has subsided in the emerging world, according to a ratio between the two indexes that track the measure. It’s stayed below its five-year average since the start of this year, a reversal from the last quarter of 2017.
Valuations, meantime, the other side of the risk-reward equation, look compelling, fund managers say. The MSCI Emerging Markets Index trades at a 30 percent discount to its developing-word counterpart, steeper than its 25 percent average during the past decades. The difference approached zero in the aftermath of the financial crisis.
“When you have an asset class that has better return potential, is cheaper and actually has better fundamentals then developed markets, then people should be arguably overweight,” said Jan Dehn, London-based head of research at Ashmore Group Plc, which oversees $70 billion of developing-nation assets.
Risk is so high in the developed world that Dehn suggests investors stuff up to 90 percent of their money in emerging markets. Standard Life Investments Ltd. is overweight in emerging-market debt and neutral to underweight in developed bonds in its tactical asset allocation funds, partially due to increased trade volatility and risks in the latter, according to global strategy head Andrew Milligan.
Volatility may increase in the developed world as central banks shrink balance sheets, while strong emerging-market economic growth may tempt investors, said Greg Lesko, a money manager at Deltec Asset Management in New York.
“The EM world never did QE,” Lesko said. “Growth had been the missing part of the EM story. That’s now looking better.”
For some investors, it’s simply a matter of finding “micro narratives” in markets that aren’t tied to trade headlines, said Mike Moran, chief economist for the Americas at Standard Chartered Bank.
“We still like the EM story,” he said. “The fundamental backdrop still looks pretty supportive, notwithstanding the regularity of adverse headlines on trade.”