Weekly Buzz: 🌏 The growing case for emerging markets

Global tensions – a source of uncertainty and risk for investors – are set to increase the importance of emerging markets (EM) as a hedge in portfolios. That’s according to Invesco’s annual survey of more than 80 sovereign wealth funds.

A shifting dynamic

To mitigate the risks associated with trade barriers between the world's two largest economies – the US and China – international companies are increasingly looking to diversify their operations across other EMs. That’s likely to open up new avenues for growth in developing nations. In fact, two-thirds of survey respondents expect EM returns to either match or outperform those from developed markets over the next three years.

Within the EM space, bonds are gaining particular traction. More than half of the surveyed firms use EM bonds to gain exposure to developing nations. India stands out as a top pick, with 88% of respondents expressing interest in increasing their allocation to the country’s debt – a jump from 66% just two years ago.

Another trend expected to boost EMs is the growing emphasis on near-shoring (our Simply Finance below breaks this down) and regionalisation. In response to trade conflicts and the vulnerabilities exposed by COVID-19, companies are now prioritising supply chain resilience.

As an investor, what’s the takeaway here?

Increasing strategic competition highlights the opportunities for EMs – and the importance of diversification. It's important to remember, however, that investing in EMs comes with its own set of risks. While the survey results strengthen the case for EM exposure, they also underscore the need for a balanced strategy.

If you’re looking to gain exposure to EMs, our General Investing portfolios – which invest across geographies and asset classes – provide a good balance.

📰 In Other News: The world’s biggest economy, now bigger

The US economy grew at a surprisingly nimble pace in the second quarter at 2.8% – double the pace seen in the first three months of the year. That pickup was thanks in large part to the country’s dependable growth engine: the American consumer.

Consumer spending rose by 2.3%, even as higher interest rates weighed down their finances. The news here is good: it looks like the country is on track to achieve a tricky “soft landing” – in which higher interest rates cool the economy just enough to bring down inflation, without tipping it into a recession (our Mid-Year Outlook goes into more detail).

The economic growth data had a calming effect on an otherwise jittery market. Stocks saw a sharp selloff last week, with investors growing anxious that Big Tech’s earnings might not match the massive spending on AI. That’s typical after a long rally like the one we’ve seen: a small wave of investor exits can lead to a cascade of similar moves, regardless of the bigger picture.

When it comes to a jittery market, remember to keep your long-term goals in mind. Every selloff is an opportunity to become a better investor, to add to your existing stocks at better prices, and to test how diversified your overall portfolio is.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Near-shoring

Near-shoring refers to companies relocating their operations to countries geographically closer to their home market, rather than to distant, typically lower-cost countries. For instance, a US-based company might shift manufacturing from Asia to Latin America. While near-shoring may involve higher costs for firms, it keeps their supply chains closer and more controllable.