Parametric: Don’t Give Up On Emerging Markets Yet

Between low valuations, currency movements, and diversification benefits, now is the time to be invested in emerging markets, Parametric has argued.

“Be greedy, instead of fearful, when it comes to emerging market equities.”There is already “compelling evidence” for the long-term benefits of emerging market equities, according to a research paper by the asset manager’s Head of Investment Strategy Tim Atwill. However, even short-term investors should not be dismayed by recent negative returns, he said.

“Recent performance in the emerging markets class has caused such a degree of fear, that for many investors the strategic reasons for owning the asset class no longer seem quite so compelling,” Atwill wrote.

While Atwill said the strongest arguments for investing in emerging markets are based on a “strategic, long-term perspective,” there are also more immediate reasons for why the asset class is attractive.

For example, emerging market equities are “much cheaper” than developed market stocks, he argued. The MSCI Emerging Markets index suffered three straight years of losses in dollar terms in 2013, 2014, and 2015, according to FE Analytics data. The S&P 500 posted double-digit returns in 2013 and 2014, and was broadly flat last year.

“Based on generally used valuation metrics, the asset class is cheap versus its historical average, and versus other asset classes,” Atwill wrote.

Additionally, Atwill argued that recent losses in the sector could be partially explained away by the “sharp rally in the US dollar”—a rally unlikely to repeat itself over the next three years.

“The very nature of diversification is for an asset class to be down when other asset classes are up, despite our human tendency to want assets which both diversify and only go up,” Atwill wrote.

Finally, given that investors on average hold a 9.6% allocation to emerging markets, to abandon the asset class entirely would represent a “tremendous underweight from a neutral position,” Atwill said.

“An elimination of the asset class would represent a bet which is larger than the conviction of many making the bet,” Atwill concluded. “Be greedy, instead of fearful, when it comes to emerging market equities.”