A Multi-Asset Approach to Assessing Risk and Opportunity in Emerging Markets

While there are a number of uncertainties in the global economy today, many investors may not realize the depth and breadth of potential opportunities emerging markets still offer—on both the equity and fixed income side. Franklin Templeton Multi-Asset Solutions’ Subash Pillai outlines the team’s approach to risk management when it comes to emerging market investing, noting that not all countries in this category should be viewed through the same lens.

Many investors tend to treat all emerging market economies the same, but we think this is a mistake. Emerging markets represent a broad and diverse mix of economies—with different cultures, demographics, political regimes and economic drivers. And, the potential investment opportunities are likewise diverse, as are the risk profiles.

With an opportunity set that has been expanding on both the equity and fixed income side, we see emerging markets as an important building block for a global investment portfolio.

In a prior commentary, I discussed the appeal our team sees in emerging markets, particularly in an environment where interest rates are negative in a number of developed economies. For yield-seeking investors in particular, it has become more difficult to fulfill income needs.

What many economists and academics would typically consider a “risk-free” rate of return—the three-month US Treasury bill—is currently yielding less than 2%, which barely covers inflation. As a result, many investors have recognized the need to take on more risk in order to generate capital growth in excess of inflation.

We believe emerging markets offer attractive risk-adjusted investment opportunities, with income potential via dividend yields on the equity side as well as “coupon” or interest rate payments on the fixed income side, in addition to capital growth potential.