Scouring the Globe in Search of Inflation Defense

Advisors have plenty of tools to deploy when it comes to guarding client portfolios against the ravages of inflation. They ought not to sleep on emerging markets as a way of accomplishing that objective. Advisors can meet that demand with model portfolios, including the Emerging Markets Multi-Factor Portfolio .

Source: Scouring the Globe in Search of Inflation Defense

“This model portfolio is designed for investors with a long-term horizon looking for exposure to a broad universe of Emerging Market equities primarily using factor focused ETFs. The selected ETFs provide certain factor tilts that have the potential to generate excess return relative to comparable cap-weighted benchmarks over longer-term holding periods. The strategies may use both WisdomTree and non-WisdomTree ETF,” according to WisdomTree.

There’s some evidence suggesting emerging markets are worth considering in this inflationary environment.

“Additionally, EM equities look compelling in an accelerating inflationary environment as well. While EM equities have impressive historical performance over most extended time frames, the performance has been particularly strong during years of accelerating inflation,” writes Joseph Tenaglia, WisdomTree associate director of asset allocation.

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The Outlook for Emerging Markets

The emerging market space has attracted the attention of some big money managers. For example, Ashmore Group Plc, JPMorgan Chase & Co. and UBS Group AG have all been supporting a bullish case for emerging market equities so far in 2021, predicting the category to be a prime beneficiary of the post-coronavirus economic recovery process.

Market watchers point to Asia’s relative success in containing the pandemic. China even returned to positive growth in 2020. Additionally, vaccine breakthroughs in China, India, and Russia, along with renewed demand for commodities and Joe Biden’s $1.9 trillion stimulus plan are all contributing to the broader optimism.

See also: ETF Investors Have Emerging Markets in Their Sights

Meanwhile, analysts have been upwardly revising earnings estimates on emerging market companies faster than for those in developed countries.

“EM equities and commodities have long been linked due to their similar reliance on a weak dollar and positive investor risk appetite, along with the historical composition of the MSCI EM Index,” adds Tenaglia. “But today’s EM equity asset class, led by Asian technology heavyweights, looks very different from the last time we experienced a meaningful inflationary period, during the commodity ‘supercycle’ of the early 2000s. Admittedly, the sample size, imperfect CPI inputs and arbitrary calendar-year end points make this an inexact science. But look no further than the performance of both commodities and EM to start 2021 for validation of these trends playing out once again.”

For more on how to implement model portfolios, visit our Model Portfolio Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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