Measurable risk and volatility have declined in emerging markets over the past 10 years, providing attractive long-term risk/return characteristics, according to a study by Chicago-based Northern Trust Global Investments. “In our view, this asset class has ‘grown up’ from its volatile past,” the study says. It recommends that emerging market equities become a core element of investors’ long-term allocation strategies.
While correlations among global equity markets are increasing, the study shows that investors could have added 100 basis points in return at no additional risk by doubling their exposure to emerging markets in an international portfolio over the past 14 years. It says many US investors could benefit from a minimum core EM allocation of 12% to 14% for an international equity portfolio.
Alain Cubeles, senior investment strategist at Northern Trust, says the evolution of global equity benchmarks allows investors to select and manage their international allocations in a structure similar to their US investments.
Structural reforms in emerging markets have provided a more stable investing environment, with lower deficits and less inflation, the study says.