SSGA: Down-side skew in EM equities returns

State Street Global Advisors see a “down-side skew” in this asset class. As shown in Figure 1, that is, the winners are outweighed by the losers by approximately 2.5-1. In the chart to the right one can see this skew is even worse in emerging market small caps. According to Christopher Laine, Senior Portfolio Manager at State Street Global Advisors, the best way to manage portfolios with a negative skew is through diversification and an quantitative approach.

On the back of this, Christopher Laine provides the following guidance for emerging markets for next year: “As we begin to look out to 2024, we see a relative value play in EM returning with higher rates. We think shorter duration assets are the best play, ideally ones without a strong cyclical exposure. Controversially, we are starting to add positions in China — but selectively. Our strategy is to avoid crowded trades, be careful on the quality dynamics, and do not try to catch any falling knives. The information technology (IT) and energy sectors in China look attractive at current valuations in the large cap space. The 2024 outlook for IT in Taiwan looks stellar across the capitalization spectrum, as do the consumer names in Korea. As always, stay diversified and keep looking for balance in your positions.”