Quick Take: EM Low Vol Equity as Risk Aversion Returns
Emerging Markets low risk investing in 2021: Return to the norm
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In 2020 technology-driven mega-cap EM stocks enjoyed strong returns (left chart), dominating index performance and leading to a substantial increase in index concentration. Defensive EM strategies underperformed, particularly portfolios that underweighted the largest discretionary and media names.
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As we’ve commented elsewhere, low volatility performance in 2020 was peculiar, driven by the pandemic’s specific economic consequences and a speculative global rally that resembled the TMT era.
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2021 to date is a different story, and low-versus-high beta returns have more closely resembled our long-term expectation (right chart). Although MSCI EM rose another 7.4% in the first half of the year, high-beta stocks generated negative absolute returns. Low-risk stocks not only outperformed what their betas would imply, but the market as well (middle chart).
Looking forward: Own insurance if EM volatility persists?
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Broad geopolitical risks currently connected to China have dampened EM high-beta performance and present ongoing risk to EM large-cap investments. In late 2020 the U.S. imposed sanctions against a list of companies tied to the Chinese military, and in February China enacted antitrust rules targeting domestic tech giants.
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This cloudy geopolitical outlook reinforces the appeal of low-risk EM investments as a complement to benchmark-relative strategies. Historically, low-risk equity strategies diversify other portfolio tilts and have paid off when market multiples contract. In 2021, we’ve already seen such benefits, as sentiment has deteriorated, and overvalued, high-beta stocks have sold off.
EM Low and High Beta Stocks: Actual Returns versus Beta-Implied
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