Asset Allocation Insights

EM Equities: Risk or Reward?

Timothy C. Murray, Capital Markets Strategist

Key Insights

  • Despite recent underperformance, we believe that emerging markets equities can add value over time.
  • In our view, stocks in emerging markets offer attractive valuations and geographic diversification, with companies on the right side of change.

While recent performance has been disappointing, we believe that emerging markets equities can add value to a portfolio over the long term. The asset class lagged developed markets in 2019, as U.S.‑China trade tensions weighed on its export‑oriented economies. This year, uncertainty surrounding the coronavirus outbreak is causing heightened volatility.

Although these challenges may prompt investors to question the value of an emerging markets allocation, the sell‑off has, in our view, resulted in compelling valuations relative to developed markets. Emerging markets also offer geographic diversification without some of the structural headwinds developed international stocks face.

For instance, interest rates that are near zero or negative have weighed on profit margins in European and Japanese financials. In contrast, still‑healthy interest rates in emerging markets and rising utilization by consumers support financials in those countries, enabling them to potentially grow revenues faster than their developed market peers.

Further, developed international markets have limited exposure to companies in high‑growth technology industries like cloud software, social media, and online retail. These “new tech” players are, however, common in emerging markets, especially in Asia where interactive internet use and e‑commerce is even more prevalent than in the U.S.

Despite their periodic volatility, we believe that emerging markets equities offer attractive valuations, beneficial geographic diversification, and a strong growth profile—with companies on the right side of change.

The Case for Emerging Markets
Attractive valuations and exposure to disruptive technology

Sources: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. Standard & Poor’s and MSCI (see Additional Disclosures).

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