MSCI, the investment research firm known for its Emerging Markets Index (EM), classifies 24 countries as emerging markets. Some of the countries included in the index are Brazil, Chile, China, Colombia, the Czech Republic, Egypt, and Greece.
In evaluating markets worldwide, the EEM index looks at the country’s overall economic development, how accessible its financial markets are to foreign investors, and the size and liquidity of its stock markets.
‘A core part of your portfolio’
With the exception of China, Hyat, said emerging markets “are resilient to the geopolitical noise” coming from G8 countries like the U.S., Germany, Russia, and Japan.
“There’s trade from one emerging market country to another. That’s about 30% of global trade now,” Hyat said. “There are strong middle classes rising in countries like Vietnam and India and some African economies that increasingly are part of the economy without getting caught up in geopolitical conflicts and trade wars the way 20, 30 years there was this contagion that kind of wiped out all emerging markets together.”
For Hyat, the financial crisis of 2008 was a great example of contagion being down, seeing as while “the G8 economies were in deep trouble, most emerging markets did really well.”
“We think the era when you choose whether to be in emerging markets or out as a small part of your portfolio is absolutely over,” he said. “Emerging markets have to be a core part of your portfolio. And if you’re looking for growth, it’s not going to be in the 1 percent, 2 percent macro growth you’re going to get long term in Europe and the U.S. It’s going to be in emerging markets.”
The biggest risk with emerging markets
But even though emerging market economies have opportunities for growth that may not be available in more developed economies, Hyat said investors have to consider risks when including them as a core part of their portfolios.
“The biggest risk is probably trade wars and the fact that underpinning trade wars is, of course, techlash,” he said, referring to a backlash against tech companies. “I think a lot of the trade discussions are really a Trojan horse for what is really a battle in terms of intellectual property right ownership, technology theft, and that relationship between China and some of the big technology companies here. So clearly the China slowdown, the techlash risk is something I would say that for China specifically matters. And when China slows down, the rest of the world will see a negative impact from that.”
Last month, China reported a growth rate of 6.6% for 2018, its slowest in nearly 30 years. This comes as China struggles to control its debt and negotiate a trade deal with the U.S.
The iShares MSCI Emerging Markets ETF (EEM) was trading at $42.06 per share on Monday afternoon, down $0.10 (-0.24%). Year-to-date, EEM has declined -10.74%, versus a 1.83% rise in the benchmark S&P 500 index during the same period.
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