Emerging-market debt outperformed its U.S. and developed-market peers in the first quarter of 2014, while emerging-market equities underperformed despite a late rally.
What could this mean for investors? Get insight in this quarterly report from our emerging-market equity and debt investment professionals—Bob von Rekowsky, emerging-market strategist, John Carlson, portfolio manager, and Sammy Simnegar, portfolio manager. They are among the most respected and experienced in the industry. Collectively, they have 75 years of investment experience, and more than 60 years combined at Fidelity.
Their key conclusions:
- The trials that emerging markets (EM) faced in Q1— including heightened geopolitical risks, slowing growth in China, and the U.S. central bank’s tapering of asset purchases—will likely remain in place for Q2 and beyond.
- A late first-quarter rally and low valuations may buoy hopes for EM equities, but uncovering opportunities requires a disciplined approach to security selection and credit analysis.
- Emerging-market debt has been a bright spot, and yields may remain attractive relative to U.S. and developed-market bonds.
- Despite concerns about a heavy EM election calendar in 2014, our research suggests EM countries have historically outperformed the broad equity market after elections.
Get a deeper dive into each theme below.
Fidelity Institutional Portfolio Manager Brian Drainville and Investment Capability Director Andy Rubin also contributed to this report. Fidelity Portfolio Manager Greg Lee and Equity Research Sector Specialist Aliasgar Bharmal contributed to the Election Effect report. Fidelity Vice President and Senior Investment Writer Matt Bennett provided editorial direction.
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Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for investments that focus on a single country or region.
In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.
1. For government debt, emerging markets are represented by JPMorgan Emerging Markets Bond Index (EMBI) Global; U.S. debt by Barclays U.S. Aggregate Bond Index; and developed markets by Citigroup Non-U.S. G-7 Index. For equity, emerging markets are represented by MSCI® Emerging Markets (EM) Index; U.S. stocks by Standard & Poor’s 500 Index; and developed markets by MSCI® Europe, Australasia, Far East (EAFE) Index. The index performance includes the reinvestment of dividends and interest income. Securities indices are not subject to fees and expenses typically associated with managed accounts or investment funds.
2. FactSet, as of Mar. 31, 2014.
3. FactSet, as of Mar. 31, 2014.
4. FactSet, as of Mar. 31, 2014.
Barclays Global Treasury Index tracks fixed-rate local currency government debt of investment-grade countries in developed and EM markets.
JPM® EMBI Global Index, and its country sub-indices, tracks total returns for traded external debt instruments issued by emerging-market sovereign and quasi-sovereign entities.
Barclay’s U.S. Government Bond Index is a market value-weighted index of U.S. gov’t fixed-rate debt issues with maturities of one year or more.
Barclays U.S. Aggregate Bond Index is an unmanaged, market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year.
Citigroup Non-USD Group-of-Seven (G7) Index is designed to measure the unhedged performance of the government bond markets of the G7 excluding the U.S., which are Japan, Germany, France, United Kingdom, Italy, and Canada. Issues included in the index have fixed-rate coupons and maturities of one year or more.
MSCI® Emerging Markets (EM) Index is an unmanaged market capitalization- weighted index of over 850 stocks traded in 21 world markets.
MSCI Brazil Index is designed to measure the performance of the large- and mid-cap segments of the Brazilian market. The index has 75 constituents and covers about 85% of the Brazilian equity universe.
MSCI India Index is designed to measure the performance of the large- and mid-cap segments of the Indian market. With 69 constituents, the index covers approximately 85% of the Indian equity universe.
MSCI Europe, Australasia, Far East (EAFE) Index is an unmanaged market capitalization-weighted index designed to represent the performance of developed stock markets outside the U.S. and Canada.
BofA Merrill Lynch U.S. High Yield Master II Index tracks the performance of below-investment-grade, but not in default, U.S. dollar-denominated corporate bonds publicly issued in the U.S. market, and includes issues with a credit rating of BBB or below, as rated by Moody’s and S&P.
Standard & Poor’s 500 Index (S&P 500®) is an unmanaged market capitalization-weighted index of 500 widely held U.S. stocks and includes reinvestment of dividends.
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