Rob Arnott of Research Affiliates (and PIMCO All Asset All Authority) overweighted portfolios to emerging markets a couple of years early. But he rose their rebound through 2016. Now, he makes the case that the emerging markets recovery still is in its early days. He says low equity valuations, depressed currencies, and positive momentum all favor emerging markets assets for the next 10 years.
Just as the unusual occurrence of three goals triggers the throwing of hats into the hockey rink, today’s similarly rare combination of exceptional valuation levels, depressed currencies, and powerful momentum—both price and economic—should encourage long-term investors to “throw their hats” into the emerging markets rink.
We emphasize long-term investor because it’s impossible to possess the clairvoyance to perfectly time the markets. Most of the volatility in shorter-term price changes is unpredictable noise. By contrast, long-term returns are mostly a function of yield, plus growth, both of which can be estimated with increasing accuracy as we look further into the future. Accordingly, at Research Affiliates we focus on gauging which assets and currencies are priced to deliver attractive returns over longer horizons, all while using shorter-term price and economic momentum as a barometer for the conviction in our expectations of future returns. Let’s dig a little deeper.