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July 21, 2016 10:32pm PDT NEW YORK – July 21, 2016 — According to new data from UBS, the world’s largest bank, the global equity market has been on an explosive growth pace this year. This growth has been fueled by a massive rally in stock prices driven by rising expectations for next year’s acquisitions and oil discoveries. This sector-leading performance was helped along by a combination of reasons. A sharp rise in the value of U.S. equities, which surpassed US$100 billion for the first time this year, coupled with a stellar performance by emerging market shares. Emerging market shares have grown at an annualized rate of almost 6 percent this year alone—a level that hadn’t been experienced since 2005 when China’s stock index hit an all-time high. And last week’s surprise gains in oil and property prices were only the latest sign of an outright rout in emerging markets shares so far this year. The sector-leading performance of equity surged to unprecedented levels last quarter as investors rushed to buy the most expensive stocks available on the market at record lows, triggering a double top that pushed the S&P 500 up over 300 points while also ushering in another record-setting quarter for emerging market shares. Resurgent demand from institutional investors, coupled with overall fund manager confidence and leverage levels that have remained strong for some time now point to renewed bullishness for emerging market equities after

What is the current climate in emerging market equities?

Emerging markets have witnessed a rapidly growing market share of the global economy over the last few years. The region’s rapid growth has been driven by growing demand for oil and natural gas from China, India, and other Asian partners. In addition to this demand, emerging market stocks have also grown at an annualized rate of 6 percent since 2011, when the financial crisis began. This rapid growth in the region has been supported by strong growth in private equity, a potentially lucrative source of capital for emerging market investors and other investors who aim to acquire shares in emerging market stocks. Despite their growing size and importance, emerging market stocks remain relatively cheap compared to other major stock market indexes, particularly the U.S. S&P 500 and the FTSE AllWorld. This may be due in large part to investor confidence in emerging markets following the recent events in that region and the ongoing financial crisis in that region.

Emerging markets’ market value rising steadily

The average shares held by global investors was 2.6 times the amount reported for specific portfolios during the financial crisis, according to research released by the Investment Company Institute. This means that investors in emerging markets tend to have higher wealth, longer retirement ages, and smaller families than the average investor. In fact, the global average shares out of all stocks in the portfolio increased by more than 10 times during the financial crisis, making the strategy of investing in emerging markets more attractive. In contrast, the average for all major market indexes plummeted by more than 9 times during this time.

Many emerging markets experiencing acute oil and commodity shortages

This is likely due to the current high levels of oil and natural gas prices in the market. As oil and natural gas prices have plummeted in most of the world since early last year, many emerging market stocks have seen a dramatic decline in price. As a result, many investors have found themselves with less than ideal compensation for their purchases of various stocks that were once trading at levels that were just shy of national parities. These have included many shares of struggling companies like Enron, L Brands, and Procter and Gamble. Though these stocks have seen sizable losses since becoming gushed up in the oil market, many other stocks in the emerging markets have also seen major gains.

Risk management remains challenging for emerging markets

Emerging market regions are being challenged by a number of factors that have led to a 40 percent decline in absolute return on assets (ARROA) during the last few years in many of these regions. One of these factors is the ongoing struggle by many of these emerging market countries to establish investment friendly environments in markets like China and India. Emerging market investors have also been hit hard by changing regulatory environments in many of these countries, which have led to the adoption of various strategies and rules to manage their investments well. Though the number of capital requirements has decreased in some of these countries, the number of investment bearing entities (IBU) remains very high in many of them.

Conclusion

Emerging market stocks have seen a dramatic decline in price during recent months as investors have given up on the notion of owning these stocks and instead looking toward institutional investors for funding. While this has impacted the performance of many of these stocks, the most significant factor that has led to such a dramatic decline in the S&P 500 is the increasingly challenging environment for emerging market stocks. Furthermore, investors have been hit hard by changing regulatory environments that have led to more challenging investment management for many of these countries. That said, these factors are not the only ones that are causing the decline in emerging market stocks and We estimate that a combination of factors has led to this decline and expect these factors to continue to evolve in the future. For investors who want to get involved in a more diversified portfolio of emerging market stocks and want to see the rankings tracked, we highly recommend the Morningstar Institutionaliquity Index Fund. This fund has been benchmarked against the S&P 500 and has had an annual return of 18.6 percent since 1994.

Did you know ?

The Investment Company Institute (I2I) reports that in order for every business to be included in the fund, it has to have an investment philosophy afifected to it. Read on to find out more about the Investment Company Institute philosophy and what that means for investors.

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