Global equities, European equities and government bonds are among those that saw a worse performance over 10 years. However, while emerging market (EM) equities outperformed these other markets in six of the 10 individual years, in two of the 10 years they were the worst-performing asset class.
By contrast, in two of the three years when EM equities did poorly, EM debt was among the best performers, and over 10 years, a 50/50 portfolio of emerging market equities and debt produced an annualised return of 11.8%.
Asset class combo
Harnessing dividend-paying emerging equities and emerging market debt could therefore produce similar returns to a pure emerging equities portfolio, according to the research.
“Combining the two asset classes allows investors to access diversified streams of income and tap into EM growth with lower volatility than a pure equity approach,” according to Richard Titherington, chief investment officer of emerging market equities, and Pierre-Yves Bareau, chief investment officer for emerging markets debt, who led the research.
With more and more EM companies paying strong and rising dividends, EM equities have become a sustainable source of income. Investors are seeing EM as an important tool in income portfolios. In the low interest rate environment that has prevailed since the financial crisis, EM debt has been sought for its higher yields, as well as for the fiscal strength of many issuers relative to their developed world peers.
The three major emerging market debt indices, which are US dollar, local currency and corporate, are more geographically diverse. Latin America and Eastern European markets have seen a significant representation, despite a heavy influence of Asian stock markets in the benchmark MSCI Emerging Markets Index.
Research conclusions
Focusing on dividends in the equity part of a portfolio can produce superior risk-adjusted returns over time, indicating a continuing long-term growth story for EM. Emerging market dividends are growing at a faster rate than those of developed market companies, and the compounding effect of dividend reinvestment is amplified through this faster dividend growth.
At the same time, emerging markets issuing debt are now in a far stronger fiscal position than even a few years ago, yet emerging market bonds continue to offer premium yields and attractive valuations compared with developed markets.
