2018_08_05 — “Inconceivable: Emerging market might not mean what you think it means”

Inconceivable*: Emerging market might not mean what you think it means

Traditionally, emerging market (EM) economies have been thought of as nascent, high growth, volatile economies that are generally smaller than developed market economies.** In the past, most EMs also fell under the derogatory terms of “Third World” or periphery countries. In recent years, although the business world recognizes China as a global economic force — as it vies with the U.S. for the top spot as the world’s largest economy — on average, U.S. investors have only a small allocation of their portfolio directly allocated to emerging markets, usually through an EM or diversified international fund. For example, EM stocks represent approximately 12% of global equity exposure (up from less than 5% in 1994), but only approximately 3% to 5% of current U.S. investor equity exposure.

  • By 2030, four of the largest seven economies in nominal GDP terms will be EMs and six of the largest eight in PPP terms will be EMs
  1. Direct exposure through emerging market investments (EM stocks, bonds, alternatives, and limited partnerships)
  2. Indirect exposure through developed economy multinational companies (DM stocks, bonds, alternatives, and limited partnerships) that derive a large or growing proportion of profits or revenues from EM countries
  • Less volatile sectors or themes, like the growth of EM domestic demand (a.k.a., the EM consumer)
  • Opportunities in smaller EM economies that have a low correlation to the rest of EM
  • Private equity or alternative EM investments that are typically priced on a quarterly basis
  • DM multinational companies that are growing sales in EM countries

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Michael Ashley Schulman

Michael Ashley Schulman

Avid traveler and art fan, also Partner & Chief Investment Officer @Running Point Capital, a multifamily office and ultra high-net-worth money-management firm