The Road Less Traveled
Finding Alpha Opportunities in Smaller Emerging Markets
October 10, 2013
The “next 50” or so smaller emerging markets (EMs) offer first-mover exposure to some of the fastest economic and corporate-profit growth in the world. And because stocks in these markets largely fly under the radar of the mainstream investment community, investors can access this next generation of EM growth at very attractive valuations.
The next 50 EMs are far from homogenous, ranging from the wealthy oil-producing countries of the Persian Gulf to the rising manufacturing centers in Southeast Asia to the resource-rich nations of Latin America and Africa. Because they have such dramatically different growth prospects and risks, and their companies are more domestically oriented, these smaller EMs are significantly less correlated with one another—and, thus, with developed-world stocks—than are the mainstream EMs (Display). As such, an allocation to the next 50 markets can provide strong diversification in a global equity portfolio.
We believe that the greatest upside potential lies in the many promising up-and-coming local stocks that are less likely to be found in the major frontier indices, which tend to be heavily concentrated in the largest, most popular companies in the most liquid markets. Investing in the companies that other investors tend to bypass also allows us to build greater diversification into our portfolio, in turn helping to further diminish overall risk.
Risk-tolerant investors seeking higher returns, low correlations with other assets and/or an alternative to conventional equity strategies should give the next 50 EMs a closer look.
Next 50 EMs Trade More Independently of One Another
Average Correlation Between Countries (Hedged)