Don't Panic: Why Downside Protection Is So Powerful For Emerging Markets Investments
To state the obvious, emerging markets equities are risky. Investors are exposed to extreme levels of unpredictability due to elevated levels of political, currency and liquidity risk. However, there is another little-known characteristic of this asset class that further reinforces this notion of risk - emerging markets routinely experiences large drawdowns.
In fact, in every calendar year since 2001, the MSCI Emerging Markets Index has posted a market drop exceeding 10%, with nearly half of these drawdowns exceeding 20%. Perhaps most surprising, these drawdowns can happen during strongly bullish calendar years. For example, 2004, 2006 and 2009 all experienced calendar-year index returns in excess of 25%, but they also experienced maximum drawdowns in excess of 20%.
Given the common definitions of a 20% drop indicating a bear market and a 20% gain indicating a bull market, this means emerging markets investors experienced a bear market on their way to booking a bull market return for each of these three years. Now that is volatility!