If everyone loves EM, why isn’t it outperforming?? “Emerging Markets Look Poised for a Good 2021”, “…the case for emerging markets is looking more attractive…” and “Emerging Market Equities Set for Outperformance” was the battle cry as thought leaders ruminated over prospects for 2021. The consensus views from Lazard Asset Management (April 20, 2021), Barron’s (October 6, 2020) and The Outsourced Chief Investment Officer (February 16, 2021) and many others all carried the same message: this is the year for emerging markets (EM) to outperform!
With EM equities underperforming the U.S. markets in 8 of the last 10 years, including year-to-date 2021, many prognosticators had been predicting this on a somewhat annual basis! What has been going on and where do we go from here?
The emerging market equity space is usually defined as countries where the financial markets are less developed than in the U.S. or the major European financial centers. The list of countries usually includes the largest names such as China, Taiwan, India, South Korea (but not always), Brazil, Russia, Saudi Arabia, and Mexico. Other parts of Asia are also considered emerging markets, but Japan is considered developed.
During the post-Covid period, U.S. markets rallied strongly and the thought was that emerging markets would follow suit. The reasoning went that EM equities were relatively much cheaper on a value basis than U.S. equities and that would encourage the flow of capital to those markets, all while overseas factories geared up to replenish stockpiles depleted by the pandemic.
Of course, that is not what has happened; so far! As seen from the chart below, many of the largest countries in the emerging markets, including China, South Korea, and Brazil have racked up large negative returns YTD detracting from the overall EM market (the IEMG ETF, second from right) producing a +3.60% YTD total return compared to the robust +26.27% total return shown by the U.S. large cap market (IVV, rightmost column). Other EM ETFs that do not include South Korea as EM equity still underperformed miserably, including SCHE with a +4.13% total return.
Philosophically, Dattilio & Ash believes in long term strategic investing and does not try to time the market. We certainly believe and understand that EM equities are relatively “cheap” compared to U.S. equities, but that does not mean we can time when that value will show up! We believe that a well-diversified, global, multi-asset approach will reward long term investors over time.