Matthew PeronChief Investment Officer, Senior Managing Director | 2018

Emerging Market Equity Positioning

While the positive growth differential of EM in relation to Developed Markets (DM) is familiar, what is perhaps less well recognized is the divergence of potential opportunities between regions.

EXECUTIVE SUMMARY

The traditional long-term investment case for Emerging Markets (EM) is based on their superior growth dynamics and diversification benefits. While the positive growth differential of EM in relation to Developed Markets (DM) is familiar, what is perhaps less well recognized is the divergence of potential opportunities between regions. As EM economies shift from their export-dependent, commodity-intensive models of the past and move toward more sustainable, services-led domestic drivers of growth, these markets are becoming increasingly diverse and sophisticated.

EM is often viewed as a monolithic asset class by investors, who refer to the growth and risk considerations within EM broadly even though levels of economic and financial market development may vary significantly in some cases. While a common set of factors may affect the broad-based universe in certain situations, we believe it is crucial to understand the fundamental differences in countries and regions that ultimately drive potential growth and returns.

In this paper, we outline the forces at work behind the shift underway in emerging economies and examine the allocation considerations investors now need to take into account within a globally diversified portfolio. Our analysis is based on the latest data, supplemented by research from the international financial and academic community, and incorporates our proprietary 4-Ps multifactor framework:

POLICIES to support economic growth and prosperity;

A POPULATION that is younger and growing more rapidly with higher levels of productivity;

The POTENTIAL for greater innovation in industries of high intellectual property that generate above average secular growth and returns;

A superior PROFITABILITY profile of the publicly traded companies.

Given Asia’s rising economic importance and growing equity and fixed income markets, we conclude that the region presents a compelling opportunity for long-term investors searching for growth. The potential diversification benefits of EM Asia assets also underscore the investment case for including them as a core, strategic allocation in investor portfolios.

CONTINUE READING

While the positive growth differential of EM in relation to Developed Markets (DM) is familiar, what is perhaps less well recognized is the divergence of potential opportunities between regions.

Sources and Disclosures

Sources for 4P Data

BCA Research

Bloomberg

Bureau of Labor and Statistics

CEIC Data

CIA World Factbook

Cornell University

FactSet

Global Innovation Index

Goldman Sachs

Heritage Foundation

Insead

International Monetary Fund

Ned Davis Research

OECD

SC Johnson College of Business

St. Louis Federal Reserve

tradingeconomics.com

WIPO

World Bank



Important Disclosures

City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

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