Taking a Long-Term Perspective
Generally speaking, when investing in emerging markets, it is beneficial to have a long-term time horizon in order to maximize returns. In fact, this is the most prudent approach when investing in any equity market.
So, what’s the difference with emerging markets?
Emerging markets in general tend to experience greater variability in price performance, but in fact, have a track record of outperforming developed markets over the long-term.
To put this concept into perspective, during the 15-year period ending November 30, 2016, the MSCI Emerging Markets Index produced a total annualized return of 9.2%, compared to a return of 5.2% for the MSCI World Index over the same time frame.1
This does not necessarily mean that emerging markets do not perform well over shorter time periods. For instance, for the 1-year period ending November 30, 2016, the MSCI Emerging Markets Index produced a total annualized return of 9.3%, compared to 4.2% for the MSCI World Index.1
The reality is that the performance of all markets, including emerging markets, typically vary throughout different business cycles.
But given that emerging markets offer more high-growth opportunities, the scope for generating excess returns over the long-term is greater when compared to developed markets.
Active Management: The Optimal Way to Access the Emerging Markets
The optimal way to access the emerging markets is through an active style, where the portfolio manager focuses on finding pockets of value that have the best risk-reward characteristics. These opportunities are typically associated with secular growth themes, such as technology, healthcare and domestic consumption, that are expected to be dominant over time, regardless of the trajectory of the country’s economic growth.
These factors, i.e. having a long-term perspective and taking an active approach, are key for successfully investing in the emerging markets.
1 Bloomberg data, total annualized return, in CAD terms, as at November 30, 2016.