May 23

Time to reconsider emerging markets?

After a prolonged period of market volatility, the news from emerging markets has taken on a more positive tone since the start of 2016. For example, the economic reports from China have been more encouraging, with import and export data improving in March and first quarter GDP growth meeting expectations at 6.7 per cent. Even Brazil, one of the worst performing markets in 2015, has improved, helped in part by the recovery in key commodity prices.

However, investors in general remain cautious. China’s economic growth rate continues to slow and while the transition towards a more sustainable and balanced economy looks promising, the journey may be bumpy. A stronger US dollar has also traditionally weighed on emerging market returns, though the more cautious approach by the US Federal Reserve towards raising rates has seen that particular headwind diminish.

This has made the decision for investors more challenging. While the overall growth potential from emerging markets remains attractive and the current valuations, especially relative to developed markets, are appealing, the investor is left wondering whether now is the right time to commit. A key challenge remains around the inherent volatility in the asset class, and the preference for a reasonably clear investment horizon.

One solution is to identify a manager that can participate in the long-term growth potential while at the same time helping to mitigate that inherent volatility. One such strategy is investing in emerging market stocks that offer both capital growth potential as well as higher than average dividend yields. Over the last 20 years, dividend yield has been an important component of total return in emerging markets and also introduces some defensive characteristics into the portfolio, making this strategy an attractive long-term proposition.

To discuss your investment options, speak to your financial planner at Leenane Templeton on 02 4926 2300 or email success@leenanetempleton.com.au

Source: Zurich

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