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High time to enhance diversification?


Most investors fundamentally understand that “timing the markets never pays.” Yet that doesn’t stop them from asking the burning question: Is “now” a good time to buy stocks—and specifically, emerging market stocks? 


As long-time emerging markets investors, the recent volatility has not altered our thesis that anyone looking to add diversification potential and a differentiated return stream to his or her portfolio may wish to consider emerging markets for a long-term investment. Yes, even now after the tumultuous first quarter. Perhaps especially now. 


Of course, any buying decision depends on objectives, risk tolerance, and a host of factors specific to each investor. But for those questioning an emerging markets allocation today might want to look at back at previous bear markets 


Corrections in bear markets—loosely defined as a 20% or greater decline in the index—have not been uncommon in emerging market equities. Over the past 30 years, this has happened a dozen times. 


But the average one-year gain for those brave enough to buy following a bear market was over 42%. The rally after the 2000 -’01 bear market was the obvious outlier as it also had to contend with a bear market in 2002—the dreaded double dip—which impacted the final numbers. But the other 11 times illustrate the prudence of buying during these times when others are fearful.  


Although there remains significant uncertainty regarding global growth rates and any economic recovery, the average trailing price-to-book value ratio—often considered a metric of undervalued stocks—was approximately 1.4 times for emerging markets asset class, as of the end of the first quarter. This is similar to the period at the end of the bear market in 2016 and the Global Financial Crisis. It is also a 29% discount to the historical average. 

For those investors with a long-term view, it may indeed make sense to capture the potential diversification benefits by owning emerging market equities now despite the emergence of this global pandemic.