It’s a good time to take money out of DMs

Oksana Patron

14 February 2023

Emerging markets (EMs) currently offer greater upside compared to developed markets (DMs) as this asset class has just turned the corner after many years of underperformance, according to Robeco.

The manager, whose multi-asset portfolios remained overweight EM equities, said the asset class was supported by the fact that its central banks were less engaged in inflationary quantitative easing (QE) compared to their Western peers, offering significant return differential.

“Emerging markets have always been sold on the promise of higher risk, higher returns, driven by higher economic growth, and considering the return pattern since 1992, when this asset class was first born, they have not delivered. Instead, we have had two massive and lengthy upwaves, and two disappointing periods of underperformance, especially over the last ten years,” Robeco said in a note.

“Recently we have turned more upbeat on emerging markets and have moved overweight in our portfolios, taking the money out of developed markets while staying neutral on global equities overall. We are at the start of a new relative upswing that could last for years.”

Robeco also confirmed its Expected Returns five-year outlook from last September, in which it forecast 4.0% annualized returns in developed markets, and 5.25% for emerging markets, and said it was quite timely from a tactical perspective today.

Another factor that investors may want to consider when thinking about investments in emerging markets was decoupling from the dominance of US.

But this would mean following China’s lead more than America’s, though China’s rising power and long reach meant individual country diversification benefits were limited.

“In the developed world, the US dominates, while in emerging markets, China is by far the largest index weight. Still, both return series have been dominated by what happens in the US. They move up and down together, but in the end, the US has offered much better returns over the past decade,” Robeco said.

“There is a decent chance for emerging markets to decouple, helped by the asynchronous recovery we see in China and the positive impact this will have on the rest of Asia. Sector-wise, emerging markets look different too, with a more prominent role for financials and semiconductors.”

Robeco also remained positive on EM bonds, but cautioned against the extra risk that some securities presented, such as risky Chinese property bonds.