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Monday, April 22, 2024

Emerging Market Equities For Retirement Portfolios

Are emerging marketing equities worth investing in? Wall Street experts seem to think so. Over the past year, emerging-market stocks have outperformed developed-market shares, making the former an attractive option for retirement portfolios. In fact, investment firms, like Boston-based GMO, are projecting that the returns of the emerging market equity category are projected to beat inflation by 5% over the next seven years.

Reality paints a different picture, though. Data from FactSet show that in the past 10 years, the iShares MSCI Emerging Markets ETF EEM brought on a 3.4% annualized return. That’s nearly 10 annualized percentage points lower than the 13.3% annualized return recorded by the SPDR S&P 500 SPY.

While economic growth in emerging markets is set to surpass more developed economies over the next few years, those are only predictions. Emerging equity remains a high-risk investment precisely because the companies you’re investing in are in countries transitioning from low-income, less-developed economies to more industrial. Economic markets in transition are by nature more volatile, but the long-term rewards can be worth the risk.

Still, which emerging market shares, if any, should form part of your retirement portfolio?

Credit Suisse’s Global Investment Returns Yearbook

Fortunately, Credit Suisse just released the latest edition of its Global Investment Returns Yearbook. Compiled by finance professors Elroy Dimson, Paul Marsh, and Mike Staunton, this yearbook is a comprehensive database of global reports. The yearbook reports the performance of global markets from 1900 onwards, factoring in 23 countries. It includes performance for equities, bonds, cash, and currencies.

The latest edition includes 90 developed markets and emerging markets, broadening its reports beyond equity, bonds, and cash currency returns, so you’ll know what factors contribute heavily toward success.

Using sophisticated methodologies, the yearbook’s authors place each market in the appropriate categories based on its performance that year. The book also considers the challenges faced by emerging market equities. For example, when assessing emerging markets, it’s important to remember that many have disappeared at different points since the 1900s. Their losses should not be overlooked because of this risk factor – which makes the Global Investment Returns Yearbook an invaluable resource for investors and researchers.

Sometimes, the countries that are doing well will graduate from being considered “developing” into becoming developed. In some cases, their performance is credited to established market benchmarks rather than the emerging market indices. How the credit is attributed heavily influences whether an economy gets classified as an emerging market.

Now, you may not care how a country’s stock market is classified. However, if you invest in emerging market equity index funds, you’re indirectly relying on decisions that the providers of those indices make about what counts as an “emerging” marketplace.

The Credit Suisse Yearbook reports that emerging market equities have produced an average annualized return of 6.8% over the last 121 years, compared to 8.4% for developed markets and 1 point lower in US-dollar terms. It’s worth noting that developed market bonds beat emerging market bond returns: 4.9% annualized compared to 2.7%. These long-term returns suggest that the last decade’s results are not as unusual as they seem.

Diversify Your Retirement Portfolio

There are benefits to investing in emerging market equities if you’re open to some risk. You should talk to a financial advisor to figure out if you are diversified enough and to find out if you should be taking more or perhaps less risk. Many people are running financial plans for themselves these days using online planning software. You can use software such as WealthTrace or Vanguard’s Nest Egg Calculator to plan your own retirement. You can run scenarios to see if a different asset allocation with emerging markets improves your chances of retiring without running out of money.

If you’re looking to diversify your retirement portfolio and invest in something that has the potential for higher returns, emerging markets may be worth considering. Dividends from these countries can create an additional stream of income when you retire. Thus, it’s important not only to consider where they are located but also how well established their economy is. The adage “location, location, location” holds true when choosing which emerging equity to buy. Some investments could perform better simply because of the continent or country they are in. You may also want to check on an art fund as an alternative investment for your retirement.

The optimistic forecasts for the future made by investment firms like GMO include:

  • Changes in environmental regulations and consumer trends that would lead to an increase in demand for organic foods
  • Aging demographics that will cause significant spending on healthcare in developed countries
  • A shift from high-cost proprietary medicines to cheaper generic versions
  • Demographic shifts such as greater.

GMO and other investment firms like it may very well be right, of course. But the 121-year record noted in Credit Suisse’s Global Investment Returns Yearbook suggests that they will have to be influential to overcome emerging market equities’ tendency for lagging behind developed markets.

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