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Emerging markets aren't as risky as you think!

The McKinsey Quarterly: Emerging markets aren’t as risky as you think

No question—emerging-market investments are exposed to additional risks, including accelerated inflation, exchange rate fluctuations, adverse repatriation laws and fiscal measures, and macroeconomic and political distress. These elements clearly call for a different approach to investment decisions.

However, while individual risks in each country may be high, it is important to keep in mind that they have low correlations with each other. As a result, the overall performance of an emerging-market portfolio can be quite stable if investments are spread out over several countries. At one international consumer goods company, for example, returns on invested capital for the combined portfolio of emerging-market businesses have been as stable as those for developed markets in North America and Europe over the past 20 years (Exhibit 1).2 We found similarly low correlations among GDP growth rates in emerging-market economies or between their growth rates and those of the United States and Europe over the past 15 years. These findings, we believe, also hold for sectors other than consumer goods—possibly even for banking and insurance, whose dependence on the financial system leaves them more exposed than sectors such as manufacturing or services.

Finally, academic research3 into stock market returns over the past 20 years has turned up little correlation between returns on investments in emerging economies and those in the rest of the world. Simply put, a boom in developed markets does not indicate a probable boom in emerging markets.4 Over time, the lack of a correlation has meant that emerging-market risk could be diversified away in investment portfolios. Indeed, according to McKinsey’s analysis of annual returns over the past 15 years, a wide portfolio of emerging-market index investments has not been more risky than an investment in a single blue-chip corporation in the United States or Europe.5 In fact, systematic measurements of risk find emerging-market indexes to be, on the whole, less risky than a world portfolio over the past 15 years