If you’ve been investing in emerging markets stocks, you probably have a bad case of whiplash. After a rip-roaring run in 2017, the MSCI Emerging Markets index fell 17.7% from its peak in late January 2018 through mid September. “There’s certainly a lot of volatility out there,” says Arjun Jayaraman, a manager of Causeway Emerging Markets fund. “And yes, there will be more.”
That’s no reason to run from emerging-markets stocks, though. In fact, it may be a good time to dip in, especially if your portfolio is out of line with your long-term investment plan. Even a moderately risk-tolerant U.S. investor with a 10-year time horizon should have 30% of his or her stock portfolio in foreign shares, and of that, 6% should be devoted to emerging markets stocks, says Joe Martel, a portfolio specialist at T. Rowe Price.
But you need to understand the dynamics at play in these far-flung, volatile and, yes, risky markets.
Rising interest rates and a stronger dollar are a drag on emerging-markets stocks. The Federal Reserve has hiked rates three times since late 2017, with more to come. That makes U.S. assets more attractive, pulling investments away from emerging markets—money that those countries need to fuel economic growth. “The U.S. threw a stone in the water,” says Philip Lawlor, managing director of global markets research at FTSE Russell. “And the ripples are in emerging markets