Overview

As US large-cap stocks dominated global markets for much of 2023, investors tended to ignore other regions and asset classes, particularly emerging market stocks.

• Emerging markets have the potential to be a defensive allocation in the current market when considered through the lens of diversification of returns, flows, earnings, and geography.
• Even during a recession, emerging markets demonstrate the potential to be a diversifier to an overall portfolio in a crowded market.
• By looking at emerging markets as a risk diversifier in an uncertain market, investors can unwind their portfolio from crowded US names and be better positioned for whatever comes next.

As I noted in my earlier piece, US large-cap stocks have dominated global markets this year. The investing community caught on, dubbing the handful of mega-cap stocks¹ that drove 85% of the S&P 500's return through September 2023 the "Magnificent Seven." As returns around the globe trailed those in the US, investors tended to ignore other regions and asset classes, especially emerging market (EM) stocks. I've shared my thoughts on unlocking the alpha opportunities in EM from an economic standpoint, and rather than rehash them here, I wanted to take a different tack and look at the potential for EM to be a defensive allocation in the current market, largely through diversification. In fact, looking through the lens of returns, flows, earnings, geography, and even the possible outcomes during a recession, an allocation to EM not only looks like a diversifier to an overall portfolio, but, might I suggest, even adds a measure of safety in a crowded market?

¹The "Magnificent Seven" include Nvidia, Meta Platforms, Amazon, Microsoft, Apple, Alphabet, and Tesla.