The depreciation of the Turkish lira in the summer of 2018 has generated a wider sell-off in emerging market currencies and equities. While investors know that emerging market economies, currencies and stock markets are individual, in risk-off events (times when investors sell riskier assets, such as equities, and buy safer assets, like government bonds), emerging markets become grouped together and their drawdowns become highly correlated, often inflicting large, short-term losses even on well-diversified equity portfolios.

This can be off-putting for investors, but many analysts think that the only way to earn good equity returns over the long term is to be significantly overweight emerging market equities.1 Emerging market economies are growing faster than developed markets and stocks are likely to have ‘growth-like’ properties with cheaper valuations than developed markets.

Despite this, trustees, investors and wealth owners may have reservations about being overweight emerging markets. The perceived risks may turn investors away from exposure to the world’s new paradigm shift: emerging and frontier markets are going to be the drivers of growth as these countries develop and mature into more sophisticated economies, and there should be plenty of upside to capture in an investment portfolio.

By way of example, two current and influential macroeconomic trends are how the Chinese economy is moving away from being primarily manufacturing-based, and how the middle class is growing across emerging markets. China’s shift leaves scope for smaller, less developed Asian economies to fill the void in the global supply chain. These supply chains are moving to the likes of Indonesia and the Philippines, while the growth in the middle class creates a new consumer base for certain products and services in local markets.