Emerging markets: a new dawn for the laggards

Investors in emerging-market stocks have had a lousy few years, says Andrew Van Sickle. But things could be looking up.

16-3-10-Lula-634

Does Lula's downfall mark a turning point for Brazil?

Investors in emerging-market stocks have had a lousy few years. But are things now looking up for the global laggards as well? It seems they might well be. Emerging markets "appear to have bottomed", reckon Robert Arnott and Christopher Brightman of Research Affiliates. The MSCI Emerging Market index has jumped by around 15% from its post-crisis low in January.

There have been several false dawns in the past few years, but the fundamentals now seem to be more encouraging than for some time. For one thing, the slump in commodities prices, which "shredded the budgets of producing countries", has abated, say Neil Hume and David Sheppard in the FT.

Oil may now have bottomed as Saudi Arabia has agreed to a production freeze and the US shale industry is "finally showing signs of slowing": US oil output posted its first significant year-on-year decline for almost eight years in December. So investors seem more willing to "look beyond" the glut. China's latest stimulus measures, and the country's evident determination to bolster growth, is also helping. Along with some short covering, this explains the 20% surge in iron-ore prices on Monday.

Emerging markets also suffer if the dollar rises, as the prospect of a higher yield on US assets dents demand for riskier ones. But with the Fed now unlikely to raise rates as fast as everyone expected at the start of the year, and the dollar already historically strong, there is less scope for emerging-market currencies to take another major knock. It's interesting to note, says John Authers in the Financial Times, that an index tracking emerging-market currencies rebounded against the greenback as America suffered its recession scare and has since held on to the gains, even as concern over a US downturn has eased.

Valuations also look appealing after a multi-year bear market. The MSCI index is on a price/earnings ratio of around 11, compared to 16 for the S&P 500; in 2007, at the apex of emerging-market mania, it eclipsed the S&P's valuation. A price-to-book-value ratio of 1.3 also compares favourably to the S&P's 2.4.

Brazil: enter the bull

On that score, it's hard to beat reports that Lula, who in the 2000s "came to personify Brazil's seeming rise to prosperity", as The Daily Telegraph's Ambrose Evans-Pritchard puts it, was detained by police last week. They are investigating an ongoing corruption scandal that has also led to an attempt to impeach his successor, Dilma Rousseff.

Throw in the fact that the economic news can hardly get any worse, and this could be the signal that the emerging-markets tide has turned. Brazil's stocks are already up by 30% from their January low. "When even stocks in bedevilled Brazil enter a bull market," says the Financial Times, "something is definitely going on.

Recommended

China’s new small-cap stockmarket
China stockmarkets

China’s new small-cap stockmarket

China has announced plans to establish a new stock exchange in Beijing that will be aimed at small and medium-sized firms.
10 Sep 2021
Evergrande: is China facing a Lehman Brothers moment?
Chinese economy

Evergrande: is China facing a Lehman Brothers moment?

China's property market is overheating. And one of its biggest developers, Evergrande, is in struggling to repay its debts. John Stepek looks at what'…
9 Sep 2021
El Salvador could be the shape of things to come for bitcoin – and emerging nations
Bitcoin & crypto

El Salvador could be the shape of things to come for bitcoin – and emerging nations

El Salvador has become the first nation to adopt bitcoin as legal tender. That’s an extraordinarily bullish move both for bitcoin and for El Salvador,…
7 Sep 2021
Pedro Castillo: leftist outsider who rode to power in Peru
People

Pedro Castillo: leftist outsider who rode to power in Peru

Pedro Castillo amassed support among the left-behind as a trade-union leader before riding to power in this year’s presidential race. What has the cou…
7 Sep 2021

Most Popular

Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021
How you can profit from the power of the grey pound
Share tips

How you can profit from the power of the grey pound

Higher life expectancy and surging asset prices have proved a boon for the baby-boomer generation, which has accumulated vast wealth. Younger generati…
10 Sep 2021