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Last year emerging market stocks fell by nearly a quarter. But in 2019 it has been a different story. The benchmark MSCI Emerging Markets Index has gained 13%. Chalk it up to "a new liquidity environment", say Will Denyer and Udith Sikand of Gavekal Research.
"Tighter US dollar liquidity made 2018 a terrible year for risk assets." When US interest rates are rising and the dollar is strong, money tends to flow out of traditionally risky assets, such as emerging markets, and into US securities with rising yields.
But for now, the market is expecting "abundant liquidity" for the rest of the year, given that the US Federal Reserve has paused interest-rate hikes and is set to pause its quantitative tightening (QT, the reversal of its money-printing programme). The European Central Bank has been dovish too, and intends to keep rates low for longer. In short, monetary policy is no longer a headwind for emerging markets.
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Inflows have picked up and emerging market equities are "repeatedly mentioned as sectors investors feel comfortable allocating towards", says Andrew Sheets, a strategist at Morgan Stanley. That's partly because appealing valuations come with the improving outlook. Forward price-earnings ratios of around 12 are a tad above their ten-year average, but cheap compared with most developed markets.
Positive structural change
The same number of countries now have limits on government debt and spending. In recent years current-account, or external, deficits have declined, which makes countries less vulnerableto downturns.
In addition, the long-term drivers of emerging market growth have shifted from commodity-driven sectors to consumption and technology. After peaking at 40% of the emerging market equity universe in 2008, commodities now make up less than 15%, while technology and consumer sectors comprise over 40%. These days, then, there is far more variety within the long-term emerging market growth story.
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Marina Gerner is an award-winning journalist and columnist who has written for the Financial Times, the Times Literary Supplement, the Economist, The Guardian and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany.
Marina is also an adjunct professor at the NYU Stern School of Business at their London campus, and has a PhD from the London School of Economics.
Her first book, The Vagina Business, deals with the potential of “femtech” to transform women’s lives, and will be published by Icon Books in September 2024.
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