Vineer Bhansali, Maria (Masha) Gordon
As developing nations increasingly drive global economic growth, investors may benefit from increased exposure to emerging market equities. The challenge many investors face is how to participate in this potential long-term return opportunity while enduring markets that tend to experience volatile swings. While our secular outlook for emerging markets is solid, we expect long-term success will be earned by those who can manage cyclical risks. In the first of a series of three articles, portfolio managers Vineer Bhansali and Maria (Masha) Gordon make the case for proactively managing “tail risk” in emerging market equities without having to reduce exposure to this important asset class. In subsequent articles in this series, PIMCO investment professionals will look at the importance in emerging market equity investing of incorporating macroeconomic insights and managing portfolios with high “active share,” or less of a benchmark orientation.
PIMCO’s secular view speaks to an evolving, multi-speed world where emerging market (EM) countries are poised to lead global economic growth. This strong multi-year story is likely to be punctuated, however, by periods of volatility as policymakers respond to inevitable cyclical challenges. These potential headwinds argue for an approach that is designed to help investors manage their downside risks while still maintaining their overall exposure to EM equities.
In addition to these building blocks, we believe that having a robust macro framework for decomposing EM risk relative to other risk factors and markets is key to constructing an effective tail risk hedging program. Important considerations include:
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