Emerging markets: less risk, more reward

The huge outperformance of American indices since the global financial crisis means the US has become an even larger component of the global stock market. Consequently, your global investment portfolio may be less diversified than you think.

One solution, suggests AQR Capital Management in a recent report, is to overweight emerging markets. The correlation between emerging and developed markets has fallen over the past 25 years, meaning emerging markets now offer greater diversification benefits.

Diversification aside, emerging markets are cheap. AQR estimates emerging markets should outperform developed markets by three percentage points annually in coming years – a “generationally wide” premium and one of the highest levels in the past 25 years.

Importantly for risk-averse investors, emerging market stocks have been no more volatile than their developed counterparts over the last five years. “Emerging risks,” says AQR, “aren’t what they used to be.”