In their 2011 Q&A Fidelity Investments provided an interesting long-term bullish perspective on emerging markets. A core portion of this bullish case was built around the “age wave” – the very positive demographic trends that are occurring in emerging markets:
“As an asset class, emerging market equities have seemingly been the undisputed leader in terms of risk-adjusted returns since the bull market began in March of 2009. The MSCI Emerging Markets Index generated an annualized return of 65.5% from March 2009 through October 2010, as compared to a 35.9% return for the S&P 500. Yet, that emerging market index was only marginally more volatile, producing a standard deviation, or common measure of volatility, of 7.24 versus 5.11. Normally one would expect to encounter a lot more volatility for these types of returns. This means that as far as the risk-reward equation is concerned, EM has delivered far more reward than its risk would have suggested.Now the question is whether EM will remain king despite the fact that it has gotten to be a crowded trade and that a number of countries are now tightening and imposing capital controls. I suspect that it will, but that there will be occasional sharp reversals.
As the Age Waves graph below illustrates, I think the developed world is reaching a plateau in terms of its economic potential as populations in those countries age.”
“Meanwhile, Brazil, Russia1, India, and China (the BRIC countries) and other EM countries remain on the exponential part of the growth curve. This is why I believe the emerging market sector remains compelling as an asset class despite the risks of policy tightening.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.