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Russ Koesterich, iShares Global Chief Investment Strategist

Are emerging markets the new defensives?


Emerging markets today compare favourably not just with their own histories but with more established developed markets too, according to Russ Koesterich, iShares Chief Investment Strategist.

“For much of the past 30 years, financial shocks mostly originated in emerging markets, but the epicentre for the worst economic crisis in generations has clearly been the developed world,” says Koestrich. “And as the global economy struggles to stabilise, Europe, Japan, and arguably the United States continue to be major sources of systemic risk.

“Emerging markets are not without their share of macroeconomic problems, such as inflation, corporate governance, and potential credit bubbles. But many of these countries have made tremendous strides over the past decade and for the most part, appear more stable with fewer imbalances than ten years ago. In fact, not only do most emerging markets compare favourably with their own histories, today they also compare favourably with more established, developed markets.

“The improvement in macro stability is beginning to be mirrored in a shift in volatility. While emerging markets suffered in September, over past years the difference between emerging market and developed market volatility has shrunk. This decline in relative volatility appears justified in light of improving macroeconomic stability and better growth prospects, and we’d expect it to continue.
“In light of these changes, investors should adopt a more nuanced view of emerging markets. Rather than treating them as just a high-beta, levered play on risky assets, investors should focus on the ability of certain emerging markets to provide a defensive play in the event of a recession in the developed world — with the caveat that the impact of another global recession would be ubiquitous, as it was in 2008.”

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