At Research Affiliates and PIMCO, we see two overarching reasons for long-term investors to consider continuing to hold a strategic allocation to EM equities: fundamentals and valuations.
The biggest risk when investing in an EM equity market is a funding crisis, when a company or government borrows in US dollars and investors lose trust in its ability to cover interest payments. The risk of a broad-based funding crisis in EM — especially the kind that affects the largest EM equity markets — is low. The largest constituents of the EM equity universe have the best fundamentals. China, South Korea, Taiwan, India and Russia make up nearly 70% of the MSCI EM Index.