Understanding Emerging Markets’ Volatility

Amid the doubts, skepticism and even pessimism surrounding emerging markets, there is this: Since the 1988 inception of the MSCI Emerging Markets Index, there have been seven major (25% or more) drawdowns in emerging markets. In each instance—seven out of seven times—the major drawdown was followed by a significant rally.

Notably, the average returns for the 12- and 18-month periods following a major EM drawdown illustrate the potential for gains. As the chart below shows, the last data point in the 18-month series confirms that this was true of the 2016-2017 rebound, too: From January 21, 2016, to July 21, 2017, the MSCI EM Index returned more than 60%. This is in line with the average 59% bounce back after the previous six drawdowns. Emerging market equites roared back yet again.

Emerging markets experienced another significant correction over 20% in 2018 in an environment of tighter Fed monetary policy and a stronger dollar, slowing growth in China and persistent trade tensions. Time will tell whether markets experience a similar recovery and rebound akin to prior downturns.

emerging markets equities major drawdowns and subsequent performance

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The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

Foreign Securities Risk: Risks associated with investing in foreign securities include fluctuations in the exchange rates of foreign currencies that may affect the U.S. dollar value of a security, the possibility of substantial price volatility as a result of political and economic instability in the foreign country, less public information about issuers of securities, different securities regulation, different accounting, auditing and financial reporting standards and less liquidity than in U.S. markets.

Emerging Markets Risk: Emerging market countries may have relatively unstable governments and economies based on only a few industries, which may cause greater instability. The value of emerging market securities will likely be particularly sensitive to changes in the economies of such countries. These countries are also more likely to experience higher levels of inflation, deflation or currency devaluations, which could hurt their economies and securities markets.

The MSCI Emerging Markets Index represents large and mid-cap companies in emerging markets countries. Unmanaged index returns assume reinvestment of any and all distributions and, unlike fund returns, do not reflect fees, expenses or sales charges. Investors cannot invest directly in an index.

Before investing carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information which can be obtained by calling 1-800-582-6959. Read it carefully before investing.

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