David Hernandez, CFA
Through the end of May, the MSCI Emerging Markets Index has returned 17.3% year-to-date and 27.4% over the trailing 12-months. This asset class has benefitted from improvements in the macro-economic environment that took place in 2016: stronger commodity prices, more stable currencies, and a better global economic growth outlook. With this change in backdrop, broad company fundamentals have improved including earnings growth and corporate profitability (as measured by ROE). Markets have taken notice and investor sentiment has shifted, resulting in positive fund flows into the asset class.
With all these good vibes in mind, this week’s chart looks at the annual max drawdown of the MSCI Emerging Markets Index. For every calendar year, even those with very strong returns, the index has experienced a double digit max drawdown. For example, in 2006, the max drawdown was 24%, but the calendar year ended with a 32% gain. Thus far, the max drawdown in 2017 is just 3%. Based on history, investors should not be surprised to see a double digit pullback in EM this year. Even if that occurs, a strong 2017 return is possible, as these types of swings have been par for the course in this asset class.
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