by David Templeton, Horan Capital Advisors
One investment asset class that seemed to be favored by many investment advisers at the beginning of the year was emerging markets. When the crowd highly favors a certain type of investment, investors should be wary of following this crowd behavior. At the beginning of this year, InvestmentNews surveyed advisers and found the following,
"...more than half the advisers surveyed by InvestmentNews at the beginning of the year said they planned to increase their allocation to emerging market stocks. No other equity asset class was cited as often. About a third of the polled advisers said they planned to increase allocations to emerging market bonds, the most of any fixed-income asset class."
Since the beginning of the year, emerging market investments have generated poor returns for investors as noted in the above chart. The chart shows the divergent spread between the performance of the emerging markets index (EEM) versus the S&P 500 Index (SPX). The S&P 500 has outperformed EEM by nearly 24 percentage points on a year to date basis.
As the InvestmentNews article notes, emerging market bonds were another favored asset class at the beginning of 2013. I suppose the investing community thought if investors like emerging market equities, they will certainly be attracted to emerging market high yield bonds. So Blackrock's iShares came out with an emerging markets high yield bond index, EMHY. As the below chart details, the performance has been anything but stellar. The top three countryweightings for EMHY are:
- Turkey: 16.75%
- Venezuela: 14.75%
- Philippines: 9.93%
The recent protests in Turkey have raised questions about the future growth opportunities in that country and investors have sold investment assets tied to Turkey.
The options trading firm, Schaeffer’s Investment Research, Inc., recently noted in their trading floor blog the divergent views surrounding EEM's recent "death cross" chart formation.
The "pro" view: Emerging Markets Are Ready To Show Some Strength
The "neutral" view: Is this the End of Emerging Market Underperformance?
Given the recent underperformance of emerging markets, this may present an attractive entry point into this asset class. However, investors need to keep in mind, emerging markets have a large performance advantage over the broader U.S.equity market (S&P 500 Index) over the past ten years. I only note this in the event investors believe in the "reversion to the mean" theory
At the end of the day, the growth in the emerging markets will be tied to the economic growth prospects for these emerging market countries relative to the developed markets. What makes these allocation decisions more difficult today are the currency influences that are being manipulated by the central banks' around the globe and their respective quantitative easing programs. The article, The Currency Carry Trade, DBV and Risk, provides some insight into these currency issues.
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