Catalysts in Play: Developed market equity returns, especially those of U.S. stocks, have overshadowed emerging market equities. As a result, many investors may automatically gravitate to U.S. stocks, overlooking the long-term potential of emerging market equities.
Entry Points: Looking back to 1988, the MSCI Emerging Markets Index has outperformed the MSCI World Index by 67 percent. Investors who focus solely on returns generated over a ten-year period may not be aware of this outperformance. While emerging markets equities are associated with higher volatility, this should not diminish the diversification benefits of the asset class. An allocation of as much as 25% in emerging markets improves the return-to-risk ratio of investing only in developed markets.
- The performance of technology and Internet company shares has had an impact on the MSCI Emerging Markets Index and the MSCI World Index and some of that may be due to the mix of stocks in each index. In 2009, Internet companies had a negligible allocation in the MSCI Emerging Market Index but by the end of 2020 that allocation had increased to 23 percent. Today it is at 13 percent.
- The overoptimism among U.S. investors for technology and Internet companies was also evident in emerging markets. Boston Partners underweighted its allocation to the MSCI Emerging Markets Index because the technology and Internet stocks included in this index were overpriced.
- Valuations for technology and Internet companies in the MSCI Emerging Markets Index have come down to the point where they are in line with the overall MSCI Emerging Markets Index.
- There are attractive opportunities in Asian Internet companies today and, arguably they deserve a higher multiple than the index overall. Profitability among these firms is improving as they increase their focus on existing customers and pull back on costly efforts to expand their customer base.
Active Strategy: Boston Partners has two approaches to investing in emerging markets. A traditional long-only, active all cap strategy focuses on traditional value drivers, while a dynamic, low beta approach offers additional sources of alpha and aims for returns similar to the MSCI Emerging Markets Index with significantly lower volatility and risk.
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Definitions:
MSCI EM (Emerging Markets) Index: Captures large and mid cap representation across emerging markets countries covering approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI world index, which is part of The Modern Index Strategy, is a broad global equity index that represents large and mid-cap equity performance across 23 developed markets countries. It covers approximately 85% of the free floatadjusted market capitalization in each country and MSCI world index does not offer exposure to emerging markets.
A low beta value means that the stock is considered less risky but will likely offer low returns as well.
Disclosures:
Boston Partners Global Investors, Inc. (“Boston Partners”) is an Investment Adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply a certain level of skill or training. Boston Partners is an indirect, wholly owned subsidiary of ORIX Corporation of Japan (“ORIX”). Boston Partners updated its firm description as of November 2018 to reflect changes in its divisional structure. Boston Partners is comprised of two divisions, Boston Partners and Weiss, Peck & Greer Partners (“WPG”).
The views expressed reflect those of Boston Partners as of November 2, 2022. Any such views are subject to change at any time based on market and other conditions and Boston Partners disclaims any responsibility to update such views. Discussions of market returns and trends are not intended to be a forecast of future events or returns.
Estimates reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.
Risk:
Foreign investors may have taxes withheld. Investing involves risk including the risk of loss of principal. Value investing involves buying the stocks of companies that are out of favor or are undervalued. This may adversely affect an account’s value and return. Stock values fluctuate in response to issuer, political, regulatory, market or economic developments. The value of small and mid-capitalization securities may be more volatile than those of larger issuers, but larger issuers could fall out of favor. Investments in foreign issuers may be more volatile than in the U.S. market, and international investing is subject to special risks including, but not limited to, currency risk associated with non – U.S. dollar denominated securities, which may be affected by fluctuations in currency exchange rates, political, social or economic instability, and differences in taxation, auditing and other financial practices. Investments in emerging markets may increase risks.
