If you’re not convinced that emerging market stocks and bonds are good investments at this point in the market cycle, as many market strategists believe, Morningstar has just delivered another reason supporting that outlook.
In its latest sustainability atlas, which measures the environmental, social and governance attributes of 46 different countries based on the companies domiciled there, adjusted for market weight, Morningstar gives high marks to several emerging market countries. Colombia, Taiwan, Hungary, Turkey and South Africa all scored above 60% of the countries rated by Morningstar, outscoring the U.K., Ireland, Hong Kong and the U.S., which is among the lowest rated developed countries for ESG factors.
The high ratings of many emerging market countries wouldn’t be such a big deal if there weren’t also growing evidence that companies scoring higher on sustainability measures tend to perform better.
“A sustainability agenda just goes hand in glove with performance of a company or an organization,” said Dominic Barton, the global managing partner of McKinsey, in a recent interview with the Harvard Business Review.
Now advisors who favor emerging markets and have clients who want to include sustainable assets in their portfolios can marry the two approaches more easily.
“Some investors think if they invest for sustainability factors they won’t get exposure to emerging markets, but there are bright spots,” says Dan Lefkovitz, Morningstar indexes strategist. “Colombia ranks in the top quintile.”
And there’s good reason to want that exposure. Emerging markets are expected to once again outperform developed markets, as they did last year, because of strong growth, a weak dollar (which helps those countries with dollar-denominated debt) and a rebound in commodity prices.
(Related: Emerging Markets Surging Into 2018)