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The Case for Balanced Investing in Emerging Markets

Kenster1_GlobalValue
edited December 2011 in Fund Discussions
Interesting paper from Fidelity Research...

https://guidance.fidelity.com/static/dcle/Guidance/documents/Balanced InvestinginEmergingMarkets.pdf
(3MB PDF File)

In the mid-1990s, emerging-market investing was still in the nascent stage of maturity. Liquidity was scarce, local markets were difficult to access, and the lack of country-specific data was daunting. The underdeveloped marketplace was associated with extreme volatility, and generally relegated to investors with appetites for high levels of risk. But today, the backdrop for investing
in emerging markets has evolved considerably. Developing economies' share of global GDP-currently at 33%-has nearly doubled since the mid-1990s. Emerging markets accounted for nearly two-thirds of the total growth in global output during the past two years alone, compared to one-third in the 1960s. And they now represent more than 85% of the global population.1

But for all this growth and advancement during the past decade and a half, one thing has not changed. The two main investment vehicles in emerging markets-debt and equity-are still viewed by some investors more "independently" from each other than in the developed world. In other words, emerging-market investing is still commonly thought of as either "equity only" or "debt only." Interestingly, this thinking runs contrary to the findings of an award-winning research paper written nearly 15 years ago, which demonstrated how a balanced approach to emerging-market debt and equity may provide significant advantages over a debt-only or equity-only portfolio, while remaining consistent with the objective of high risk-adjusted total return.

The pages to follow will explore the development and maturation of emerging-market equity and debt during the past 15 years, and provide an argument for why long-term investors may want to consider maintaining a balanced approach.

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