Seedly PFF 2019
Asked on 01 Mar 2019
Morgan Stanley analysts expect emerging markets to outperform in 2019 with a base case forecast of 8% price return for MSCI EM index. Based on the earning growth prospects for the MSCI EM index, it compares favorably with the S&P500 index, standing at 10+% and 6+% respectively. However, historical data has shown that over the last 6 years the Y-O-Y earnings growth is 0. This goes to show that investing in EM is a long term strategy for investors with a high risk tolerance to be able to ride out the high volatility of the em equities market.
Year-Over-Year Earning Per Share Growth for MSCI Emerging Markets Index, Bloomberg Data
Nobody, including finance professionals, can robustly predict the stock market developments neither short-term nor long-term. EM are very risky. I attach 10 price chart of 3 large EM ETFs versus SP500.
more on my thinking: https://seedly.sg/questions/what-is-your-general-investing-philosophy-strategy
Investing in EMs can give you a more diversified portfolio if you are heavily invested into developed countries or certain industries or sectors. This can help to balance out your portfolio's risk to some degree.
I read that there was this research concluding that bondholders are more than compensated for taking on the risk of buying bonds from developing countries, even when the default rates for such bonds are high because of your coupon rates. (https://www.nber.org/papers/w25543?utm_campaign=ntwh&utm_medium=email&utm_source=ntwg23)
This risk, return reward can be quite enticing for some investors.
I think that in general, from what I read, EMs will outpace the S&P and the global market over the next decade, provide nothing too big happens.
If you are looking at emerging markets, this means that you are willing to inject slightly more risk into your portfolio, given that emerging markets are subject to much more volatile growth and price swings in market, as they are still building up their infrastructure, regulations, support systems etc.
In this case you should be aiming for stocks that have excellent growth potential, with a concrete business model, that will most likely be able to tough out possible dips in the economy during the cycles.