Gundlach: Long-term Investors Should Allocate to Emerging Markets

It has been a year where virtually every asset class has suffered negative returns. But emerging market equities have outperformed global indices and, according to Jeffrey Gundlach, that’s where investors should put their money “over the next seven and certainly the next 20 years.”

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke via a webcast with investors on December 11. His talk was titled, “In Our Time,” and the focus was on his firm’s flagship mutual fund, the DoubleLine Total Return Fund (DBLTX). The slides from his presentation are available here.

The cyclically adjusted price-earnings (CAPE) ratio for emerging-market stocks is less than half that of the S&P 500. But, in the last two decades, Gundlach said there were times when it was higher. Based on that metric alone, Gundlach said emerging-market equities could outperform U.S. stocks by 100%.

But, he said, investors need to approach emerging markets with a long-term, seven to 20-year, perspective.

Gundlach is in good company with this view. In its most recent seven-year forecast for asset class returns, Boston-based GMO predicted that emerging market equities would be the only equity asset class with positive returns over that period. GMO Chairman Jeremy Grantham, in a recent interview, reiterated his positive outlook for emerging markets. “There is very little chance that you’ll come back in 10 or 20 years and emerging will not have beaten the pants off the U.S.,” Grantham said.

Rob Arnott of Research Affiliates and Mark Mobius, who recently retired from Templeton Investments, have also predicted outperformance for emerging markets.

If there is a word of caution about these predictions, it is that they are all based on CAPE or similar valuations and the belief that valuations will “revert to the mean” over time. But there is no guarantee if or when that will happen.

Let’s look at what Gundlach said about the economy and other markets.

“Scared sick to look at it”

The title of Gundlach’s talk was taken from a 1925 book of short stories by Ernest Hemmingway with the same name. Gundlach cited quotes from that book to illustrate points during his talk.

One of those quotes was, “Scared sick to look at it,” which Gundlach said was a fitting reference to some aspects of the global economy.