Emerging markets have further to go

published 29 July 2016

Emerging markets have been the "surprise success story of the year", says Richard Barley in The Wall Street Journal. The MSCI Emerging Markets index has gained almost 10% this year, while developed-market stocks, as measured by the MSCI World index, have climbed by less than 3%. Developing-world currencies are looking a lot better too. The likes of the Russian rouble and the South African rand have made double-digit gains.

Turkey's coup was a shock, but the good news is that overall political turbulence is on the wane in emerging markets. As Capital Economics points out, there were typically around ten uprisings a year in the 1960s and 1970s, while in the 2000s there were fewer than three. "The improvement in political stability across emerging markets as a whole bodes well for emerging market economic prospects."

These are improving in any case. Commodities have rebounded while growth in China has stabilised and looks set to tick up: credit expansion reached a 26-month high in May. Firmer growth in the US and Europe in the past few months could stem the fall in exports. A growth momentum indicator set up by fund managers NN Investment Partners tracking data in 20 emerging markets has turned positive for the first time since 2014.

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Global monetary policy is likely to become looser, while the US central bank has postponed interest-rate hikes. This makes riskier assets such as emerging markets more appealing. What's more, "valuations remain attractive", notes JP Morgan Private Bank's Stephen Parker hardly surprising since emerging markets have lagged their US counterparts by 70% since 2012. No wonder, then, that "investors who had thrown in the towel on emerging markets in recent years are beginning to take another look", he told CNBC.com. While they aren't exactly a haven, concludes Barley, they look more appealing than industrialised-country stocks for now.