Historical returns, volatility and drawdowns can provide useful guideposts for investors to compare how asset classes behaved in different market environments over time.
Rather than expecting return levels to be replicated, astute investors might think about what historical performances reveal about how an asset class responds to periods of stress, how quickly it can rebound following selloffs, or how correlated it is to other sectors. While these trends often change in the future, they may provide a meaningful indicator to an asset class’s characteristics. It is important to look at track records over a relatively long time period that might incorporate multiple market regimes.
That said, EM is a growing and evolving asset class that makes it an exciting opportunity. However, investors should note that the growth and development of EM means that historic trends, returns, and correlations may change going forward. The current market is unique due to a number of factors, including the high amount of ultra-low and negative yielding debt in developed markets alongside persistently low inflation levels. The political sphere in both emerging and developed markets also contains a high degree of uncertainty.
While we still believe many traditional characteristics of EM, such as strong growth potential, can continue, the future may be fundamentally different than the past. The heterogenous nature of EM means that it cannot be thought of as a single investment opportunity. Investors who go deeper can uncover idiosyncratic names and sectors that may go against wider market trends. Therefore, knowledge gained from historical EM performance should be combined with a forwarding-looking market outlook and an investor’s own priorities.