To be sure, a strong dollar has rarely been a friend to EM stocks. In addition, while EM valuations are lower, so too are the markets’ growth rates. Perhaps even more importantly, divergences between EM countries and sectors are likely to widen, and there are still a few “problem children” EMs that are likely to suffer additional volatility and more downside going forward.
In addition, for those countries with large current account deficits, further currency depreciation may be required to address their imbalances (As a side note, you can read more about how the various EMs stack up¸ as well as the tactical arguments for and against increasing EM exposure, in the new BlackRock Investment Institute Paper “Emerging Markets on Trial,” and compare different EMs’ fundamentals with the Institute’s Emerging Market Tracker tool.)
This all begs the question: how much should today’s EM allocation deviate from a long–term benchmark? The answer is largely dependent on an investor’s current positioning. Particularly when it comes to a volatile asset class like EMs, investors need to consider how much risk they want to take on before they arrive at any asset allocation.
But for a theoretical investor who is willing to take on at least moderate risk and who is already at or near his or her benchmark EM allocation, I see significant opportunities to differentiate among EM countries, sectors and stocks, especially given EMs’ diverging currency outlooks, political calendars and current accounts. You can read more about which EMs I like in my new Investment Directions outlook.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.
Source: BlackRock research