Why emerging-markets exposure still makes sense

Headwinds from rising rates and trade threats may not be as strong as they used to be

Why emerging-markets exposure still makes sense

Given the performance of developing markets in recent years, some investors may see a weak or flat outlook for emerging-market stocks. There’s also a strong case for pulling back, considering the current trend of rising rates and fears of a trade war. But despite the risks, many investment strategists are telling long-term investors to keep 5% to 10% of their assets in such markets.

“It’s hard to predict how [developments in interest rates and trade] will unfold,” Alex Bryan, director of passive-strategy research at Morningstar, told the Wall Street Journal. “You shouldn’t time the market based on events.”

Rising US rates may have traditionally hurt emerging markets, but that applied more during the late ‘90s “when developing economies were in some sort of disarray,” said Karim Ahamed, investment strategist at HPM Partners in Chicago. According to Ahamed, many of these economies have straightened out since the financial crisis, whittling down their debt-to-GDP ratios to levels below the US and Japan.

Michael Sheldon, chief investment officer at US-based RDM Financial Group, also noted that US interest rates are at historic lows, which could soften any potential impact of rate hikes on emerging markets. “If rates rise more slowly than expected, it might not hurt emerging-market stocks at all,” Bryan said.

And according to Jack Ablin, chief investment officer at Chicago-based Cresset Wealth Advisors, developed-market stocks could actually be more vulnerable since hikes are mainly being carried out in developed economies.

Weighing in on the effects of potential trade tussles, Ahamed pointed out that many developing economies aren’t as export-dependent as they used to be, with more shifting their focus toward internal consumption. The trade spats grabbing headlines today, he added, seem to be more bilateral than global; the tariffs announced by US President Donald Trump in March, notably, apply only to steel and aluminum, and the prospects of trade impositions getting expanded to other products are as yet unclear.

The bottom line: investors shouldn’t base their allocations on uncertain developments. “It’s noise,” Bryan said. “The best course is to be diversified and maintain a long-term strategic allocation.”