Emerging markets bounce back

Last year emerging market stocks fell by nearly a quarter, says Marina Gerner. But in 2019 it has been a different story.


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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

China will provide a boost

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.

Advertisement - Article continues below

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.




Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020

The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019

Most Popular


What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
UK Economy

The UK’s bailout of the self employed comes with a hidden catch

The chancellor’s £6.5bn bailout of the self employed is welcome. But it has hidden benefits for the taxman, says Merryn Somerset Webb.
27 Mar 2020
UK Economy

Debt jubilee: will our debts be written off?

The idea of a "debt jubilee" – general society-wide cancellation of debt – goes back to Biblical times. Could it happen again? And would it really do …
28 Mar 2020

Coronavirus: what it means for your mortgage or your rent

Ruth Jackson-Kirby looks at all the key questions for owners, renters and landlords affected by the coronavirus crisis.
29 Mar 2020