Investment bargains in emerging markets

published 20 July 2018

905_MW_P07_Markets — Singapore has headroom and is resilient to shocks

After an exuberant 2017, emerging-market investors have had a dismal 2018 so far, says Fidelity's Tom Stevenson in The Daily Telegraph. The MSCI Emerging Markets index, which tracks the equity markets of 24 developing countries, has dropped by more than 15% from its January peak. The benchmark index of its biggest constituent, China, has plummeted by more than 20% In other words, emerging markets are in, or approaching, "bear-market territory".

So do emerging markets now "offer an incipient disaster or an incipient buying opportunity"? asks John Authers in the Financial Times. After all, emerging markets have long waves of over- and underperformance compared with developed markets. After fears of a Chinese slow landing receded in 2016, many believed that emerging markets would experience an upturn, but this seems to have reversed.

For now, there are several headwinds facing the sector. Trade tensions are a particular irritant for countries that tend to be more export-dependent than their developed-world counterparts.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

While escalating trade tensions between the US and China have undoubtedly affected some emerging markets, others have been hampered by the growing strength of the US dollar, as Annabelle Williams points out in The Times. As the US economy continues to steam ahead, the dollar keeps appreciating. A strong greenback tends to hurt developing countries because, along with the prospect of higher US interest rates, it draws money away from traditionally risky assets such as emerging markets. Moreover, some of their borrowing is dollar-denominated and the cost of servicing their debt increases as a result.

Nonetheless, as a whole, emerging markets boast solid fundamentals. For instance, in the latest cycle they have borrowed in local currencies to avoid having too much foreign debt. And they still have lower levels of public and private debt than developed markets asa percentage of GDP.

Time to buy?

There are pockets of relative safety in emerging markets, according to a Gavekal Research note. The Philippines and Singapore "both have oversold currencies, yet headroom to ameliorate external shocks". Russia can withstand a moderate decline in oil prices, and India still has "decent macro fundamentals", although its securities now look expensive.

Compared with developed markets, emerging markets are not expensive, says Stevenson in the Telegraph. According to Goldman Sachs, US investors are paying 50% more for every dollar of profit than their emerging-market counterparts. "For contrarians, the time to dip a toe back into the emerging-market pool may be fast approaching."

Marina has a PhD in globalisation and the media from the London School of Economics, where she worked as a teaching assistant on the MSc Global Media. In 2014 she was invited to be a visiting scholar at Columbia University's sociology department in New York.

She has written for the Economists’ Intelligent Life magazine, the Financial Times, the Times Literary Supplement, and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany. She is trilingual and lives in London. She writes features and is the markets editor at MoneyWeek..