However, an examination of EM relative performance since 1987 – the start date for the MSCI EM Index – suggests this has not been the case. The correlation between EM relative returns and changes in US interest rates has been low, both during normal market conditions and, more importantly, in periods where US interest rates have risen steeply, which has happened four times in the available history.
If this dogma were true, then investors may be right to fear for EMs, as DM valuations appear generally elevated and a turn in the cycle could be painful. However, there is little evidence to support this claim.
There have been five major DM bear markets since 1900 and, with only one exception, EMs either outperformed DMs or have fared evenly. The only time that EMs underperformed during a DM bear market was 2009, and they went into that downturn with premium valuations following five years of outperformance – quite a different backdrop to today.
Therefore, an examination of the data suggests history is not on the side of investors who believe EMs are speculative investments prone to always underperform in a DM bear market. As the main reasons cited for avoiding EMs don’t seem to withstand scrutiny, investors should treat EM investing in the same way they would treat any other asset class: by focusing on fundamentals and valuations. By these measures – with valuations relatively low and profitability solid – the case for investing in selected EM shares remains compelling.
Dan Brocklebank is head of Orbis Investments UK
