Some commentators have declared the demise of emerging markets (EM) as an asset class. Globalization has reversed, they contend, noting that over the past five years EM asset returns have been subpar relative to those in developed markets (DM). Indeed, growth in emerging markets has slowed since the global financial crisis, while DM economies and markets have benefited from unconventional monetary policies. Yet facts on the ground and careful analysis argue against the narrative of DM dominance. Over the secular horizon, we believe there is a strong structural case for EM assets.

We begin with a broad analysis of beta and alpha opportunities in both emerging and developed markets. We focus on ex ante measures of risk premia and relative value to estimate beta and alpha. The paper assesses whether greater macroeconomic risks in emerging markets explain higher estimates of returns for emerging economies than for developed economies.

Using a risk taxonomy associated with EM crises, we consider the current balance of risks in emerging markets compared with their DM counterparts.

Our conclusions are threefold:

1) Using standard metrics, estimated returns in emerging markets compare favorably in equity, currencies and fixed income.

2) Despite a rich catalog of crises that have boosted EM risk premia, crisis risk has risen sub­stantially in developed markets, suggesting that DM risk premia have room to adjust higher.

3) Investors are generally underallocated to EM equity and fixed income.

In sum, with regard to valuation, liquidity and systemic risk, we believe there is a strong structural case for EM assets. Quite possibly, the last shall be first.

Read about PIMCO’s constructive view of emerging markets in 2019 in “Emerging Markets Outlook: The Wealth of Nations.”

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The Author

Jamil Baz

Head of Client Solutions and Analytics

Ran Duan

Quantitative Research Analyst

Gene Frieda

Global Strategist

Normane Gillmann

Quantitative Research Analyst

Lutz Schloegl

Head of Rates, FX, Commodity & EM Analytics

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Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Investors should consult their investment professional prior to making an investment decision.

This paper contains hypothetical analysis. Results shown may not be attained and should not be construed as the only possibilities that exist. The analysis reflected in this information is based upon data at time of analysis. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.

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