By James Saft
(Reuters) – Truth is, emerging markets haven’t just been bad but are likely to get worse, especially in comparison to developed markets.
The bigger truth, however, is that most investors should simply ignore this and stick with their strategic allocations in order to get the benefit of diversification.
First I will make the medium-to-long-term bear case against emerging markets. Then I’ll explain why you probably shouldn’t really care.
There are plenty of things not to like about emerging markets.
Recent performance tops the list. The benchmark iShares Emerging Markets index ETF is down nearly 6 percent in a month and has underperformed the S&P 500 index by more than 30 percentage points so far this year. Emerging market bonds too have been hit, with the iShares JPMorgan USD Emerging Market Bond ETF falling more than 12 percent in 2013.
And there are good reasons to think the carnage is not complete. China, as shown in its recent dismal trade figures, is slowing alarmingly rapidly. That won’t just hurt investments there, but will pressure many of the resource-rich emerging markets like Russia and Brazil which have reaped the rewards of a strong appetite from China for food, energy and other commodities. The IMF on Tuesday cut its growth forecasts for most major emerging markets, and cited weakness among them as justification for a weaker outlook for the rest of the world.