AllianceBernstein: Look Across Equity, Debt, Currency to Manage Emerging Market Risk

Investors should seek emerging stocks, bonds and currencies to capture the high returns associated with emerging-market growth, with better risk management potential.

(March 30, 2012) — The economic growth and newfound fiscal strength of many emerging countries have created a dilemma for investors, according to a whitepaper by AllianceBernstein that agues the case of an active, unconstrained, multi-asset strategy. 

The paper asks: “Is it possible to reduce emerging markets’ volatility without sacrificing return potential?”

Yes, according to AllianceBernstein. Investors should seek emerging stocks, bonds and currencies.

It continues: “An investor could invest in these asset classes separately, but we believe that integrating them in one dynamically managed portfolio can generate much better risk/return potential than a stock-only strategy. An emerging-markets multi-asset strategy can provide multiple sources of return potential, and more ways to mitigate risk. Ideally, it can provide the potential for returns similar to a stock-only strategy, but with significantly less risk.”

According to Morgan Harting, who manages the firm’s emerging market multiasset portfolio research, a portfolio with emerging stocks, bonds and currencies, managed in an active strategy, can capture a greater set of opportunities amid less volatility. “We’ve had this fund for about a year, and it has done well during a volatile period,” Harting said. 

Furthermore, Harting noted that corporate bonds in emerging markets have presented higher yields and better credit quality, as more and more bonds are being issued by emerging market companies — creating more of an active market. “That’s attractive to investors — pensions and insurance companies — who require more liquidity,” Harting said. 

Related article: Is Capitalism Being Revolutionized by Emerging Markets?