Emerging Markets Are Attractive Again

Posted on December 14, 2018

Emerging markets will be again in favour as the recent rout driven by higher fuel prices and a foreign investor selloff narrowed the gap with developed economies, according to global brokerages.Valuations have fallen in emerging markets sufficiently to compensate for many key uncertainties, Jonathan Garner, equity strategist at Morgan Stanley, wrote in a report. Emerging market GDP and earnings growth versus the U.S. should narrow, according to the investment bank, which prefers markets outside the U.S. and upgraded developing nations by two notches to ‘overweight’.The growth differential, according to Chetan Ahya, chief economist and global head of economics at Morgan Stanley, will swing back in favour of emerging markets. The investment bank is overweight in Brazil, Indonesia, India and Thailand.The MSCI Emerging Market Index has fallen nearly 16 per cent so far this year compared with a gain of 34 per cent in 2017. That’s because higher oil prices threatened the developing economies and foreign investors pulled out money as the dollar strengthened and rates rose in the U.S. The S&P 500 surged to a record in August but has since erased gains as the rally lost steam, driven down by technology stocks.

Emerging market asset valuations have reverted from the “expensive” territory at the start of 2018 and they “now appear inexpensive relative to our models and to history”, Kamakshya Trivedi, co-head of emerging markets and forex research at Goldman Sachs, wrote in a note.

Macquarie recommends investors should consider small caps in Asia (excluding Japan) in anticipation of a possible emerging market surge in 2019. Small caps have underperformed the broader market by 18 per cent in the past three years due to declining liquidity and narrow market breadth, Felix Rusli of Macquarie wrote.

JPMorgan is cautious though. The expected emerging market GDP growth of 4.4 per cent in 2019 will be lower than 4.8 per cent in 2018, driven largely by a slowdown in China and intensifying external risks, according to the investment bank. Still, it expects the emerging market equities to fare better than fixed income or cash returns and other stock markets.

Emerging Markets Are Attractive Again

Emerging Markets Are Attractive Again

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