Uncommon Sense – Emerging Market Equities

Attached is the most recent “Uncommon Sense” piece put out by Michael Arone and SSGA. In this article, he suggests that now may be the time to substantially increase an allocation to emerging market equities.

We are currently comfortable with our emerging market weights in our portfolios, but this provides a different perspective on the state of the asset class. Mr. Arone’s optimism is based on the following:

1.) Turkey: the economy of Turkey is too small to cause a global panic; Turkish equity markets only account for 0.5% of the MSCI EM Index and 0.05% of the MSCI World Index

2.) China: President Xi Jinping has focused on addressing Chinese growth strategies that have slowed the economy; broad deleveraging in China should act as a positive catalyst in the long run

3.) Valuation and Growth: on a relative basis, emerging markets are cheap compared to the United States and other developed markets; additionally, emerging market economies have higher GDP growth rates, quickly developing middle class, more structural reforms and rising populations

A great deal of this optimism is predicated on China’s ability to deleverage and stabilize its economic growth rate as China makes up such a substantial portion of the EM index (note that we are well aware this is much easier said than done). Additionally, while Turkey may not be the catalyst for global contagion, this does not dismiss the possibility of other economies drastically underperforming in their own right (see Brazil, Venezuela).

Looking at the technicals: August is historically the worst performing month for EM with a bounce back in Q4