The Emerging Markets Portfolio

It is an interesting time for Emerging Markets. 2016 is shaping up to be a good year for them in a time when many developed markets are struggling. Earlier on this week, the MSCI’s emerging markets index did better than its developed markets index over the past year, but what exactly does this mean for investors?

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Although it appears that emerging markets may finally be recovering after a long bear market, there are a range of circumstances which mean it may be too early to celebrate. To begin with, world growth has been sluggish and the US dollar is weak, distorting any clear view of Emerging Markets’ true performance. Although long-term projections for India and China are strong, both countries registered declines in the most recent period. With the performance of the two strongest Emerging Market economies shaky, the market is being carried by Brazil – whose current political and economic situation makes any prediction highly speculative – Korea and Peru. Moreover, this recovery could be attributable to Emerging Markets reliance on the materials and information technology sectors. Both sectors are performing well, but any decline in metals or oils could severely impact recovery.

 

As it stands, the greatest returns from the Emerging Markets come from the places carrying the greatest risk, making the short-term extremely volatile.

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This risk is one which we take strongly into account when compiling the Henry James Emerging Markets Portfolio. Our investment process is an objective, bottom-up, quantitative screening process designed to identify and select inefficiently priced international stocks, with superior return versus risk characteristics. This is then combined with quarterly, top-down risk-mitigating country allocation system rebalancing, in which the agreement team over weights highly-ranked countries and under weights those which are lower-ranked. Typically, the portfolio invests in 50 to 70 stocks that pass our disciplined fundamental and quantitative criteria and we let our winners run. The primary performance benchmark is the MSCI Emerging Markets Index.

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