Rethinking Exposure to Emerging Markets: Is It Time to Dive Back In?

Abstract

Emerging markets have lately been the subject of many alarming stories, which are filled with warnings of potentially magnified risks and severe liquidity problems for those who remain invested in such markets. Using a database of 68 emerging-market funds and statistical tools commonly used by the market, this study thoroughly analyzes their performance from various angles. We determine that although investors who had exposure to emerging markets have indeed suffered large losses, the situation doesn’t nearly warrant the current negative hype surrounding emerging markets. Not all asset classes have been affected to the same extent, and although high risks, including liquidity problems, still apply when entering these markets, there are also internal sources of growth and very favorable correlations with developed markets. While some observers continue to call for further pullbacks, this study finds that, on the contrary, favorable current valuations mean that now is the time to increase exposure to emerging markets.