PGIM: Capturing alpha from growing emerging markets will require new investment approach

By PGIM Global Communications — Jul 21, 2017

3 mins

Emerging markets, which already command nearly 60 percent of global GDP on a purchasing power parity basis, will collectively drive global growth over the next decade, but investors would be wise to reconsider how they approach these markets. Increasingly, says PGIM, emerging markets will be the masters of their own economic fate, making a one-size-fits-all classification of emerging markets obsolete.

In Emerging Markets at the Crossroads PGIM argues the export-led, externally oriented growth model that propelled emerging markets forward since the 1980s has stalled. As aging populations reduce the long-term growth potential of developed markets, and the backlash against globalization and free trade continues, emerging markets will increasingly choose their own individual paths. Gone is the rising developed market tide that lifted all boats.

Therefore, PGIM urges investors to embrace an active, locally informed investment approach that positions their portfolios for emerging market divergence, and takes advantage of the opportunities from the increasing resilience and declining contagion risk across many emerging markets.

“We believe the opportunity will increasingly be to capture the alpha of outperforming emerging market sectors, themes and securities rather than chasing the beta of the broad emerging markets universe,” said Taimur Hyat, chief strategy officer, PGIM. “This requires building portfolios from the bottom up—the historical emerging market equity investing approach of rotating exposures to countries will no longer be adequate.”

Emerging market investors will need to focus on the cross-cutting themes, sectors and securities that drive investment returns, PGIM says.

Learn more about emerging markets from PGIM. Want to talk to Taimur Hyat? Contact Julia O'Brien.