Emerging markets have seen a net fund inflow exceeding US$1 billion in the first halfof this month, according to Bloomberg, bringing the total to US$4.5 billion since the beginning of the year. This marks a dramatic shift in market sentiment over the past few months.
Nothing goes up forever, and nothing goes down forever either.
Investors would have been well rewarded had they been greedy enough to buy into the emerging sector when others were fearful, but bottom fishing is much easier said than done. Perfect timing is almost impossible.
But can investors capture this kind of rally through diversification?
Historical data suggests that emerging markets did move differently from developed markets. It therefore makes sense to include both asset classes in the portfolio.
If we break down the market performances over the past two decades into three phases—1994 to 1999, 2000-2009 and 2010-2015—we can find some sharply contrasting patterns.
For instance, the US S&P 500 posted a return of 255 percent between 1994 and 1999, but emerging equities recorded a meager 2 percent rise in the same period amid economic or financial crises in Asia, Russia and Brazil.
But between 2000 and 2009, it’s the reverse. S&P 500 lost 9 percent during the period while emerging markets rallied by more than 160 percent.
Clearly, the bursting of the tech bubble and the US subprime fiasco could explain the huge gap in the results.
From 2010 to 2015, the situation again changed: the S&P more than doubled but emerging markets weakened by 5 percent.
By investing in both markets as a package, investors can rest assured they won’t miss the strong performer.
More importantly, investors won’t make the mistake of placing all the eggs in the wrong basket.
This article appeared in the Hong Kong Economic Journal on April 25.
Translation by Raymond Tsoi
[Chinese version 中文版]
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