Investors Don't Hold Enough Emerging Market Assets - UBS

Tom Burroughes

12 October 2018

Investors don’t hold enough emerging market equities to capture growth in these fast-growing markets, argues, saying recent market falls shouldn’t obscure the underlying promises of these economies.

Allocations to emerging market equities in global portfolios remain below 10 per cent although emerging markets make up 32 per cent of the world's equity market capitalisation, the Swiss bank said yesterday in a white paper report that crunched industry data.

Emerging market indices have fallen this year, pressured by concerns that rising US interest rates will push up borrowing costs. The MSCI Emerging Markets Index of equities, when measured in dollars, has fallen 13.1 per cent this year, for example.

But such a fall should not obscure the wider case for owning this sector, the bank’s wealth management business said.

“Emerging markets have, over the long term, added both risk and return to global portfolios to varying degrees,” it said.

“Using historical returns, we show that the inclusion of a diversified EM portfolio composed of 40 per cent equities, 25 per cent hard-currency sovereign bonds, 25 per cent corporate bonds, and 10 per cent local-currency bonds would have shifted up the efficient frontier (the return-risk ratio) of a moderate risk global portfolio,” it said.

The bank said the economic and social transformation in emerging markets over the last two decades has been “extraordinary”. The firms said many investors’ view of emerging markets is at least five if not 10 years “out of date”.

Recent market falls may have spooked investors unduly, Jorge Mariscal, head of the emerging market investment office at UBS, said.

“But a single-minded focus on the tribulations of emerging market assets risks ignoring not only the remarkable progress and transformation emerging economies and societies have made, but also the greater depth and breadth of investment opportunities they offer,” he said.

Emerging markets up over 60 per cent of the total global economic output, and over 70 per cent of global GDP growth.

Global trading of foreign exchange instruments denominated in emerging market currencies has also grown 10 times since 2001, the bank said.