A Strategy for Emerging Market Crises (Verdad)

This is Verdad’s third and final post on emerging markets. Verdad’s analysis has so far revealed two important insights:

1) a crisis investing strategy can be an attractive alternative to buy-and-hold in emerging market investing, and

2) it is possible to reap excess returns through crisis investing in emerging markets without taking on additional risk compared to investing in established markets, such as US equities or treasuries.

Verdad set out to build an EM crisis investing strategy that would take advantage of this opportunity.

Verdad feels that a crisis investing strategy that captures excess returns from crisis investing by holding EM sovereign debt and large value equities while diversifying EM risk during times of no crisis by holding 10Y US Treasuries could represent an attractive alternative to a buy-and-hold approach to emerging markets. This strategy results in equity-like returns with debt-like downside protection, based on our analysis.

Historically, this strategy was a better performer than buying and holding the S&P 500, 10Y US treasuries, overall EM debt or equities, and US and EM value stocks. In particular, this strategy beat holding the S&P 500 over the full period, 70% of rolling 5-year periods since 1993, and in four out of five 5-year periods since 1995, with double-digit returns even in periods when the S&P 500 were flat.

To download the full 55-page report, click on the link at the end of their research note. READ MORE

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