Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.

Attack and capture of Ratisbon (The Battle of Ratisbon) by the Marshal Lannes © Leemage/Corbis via Getty Images

"One could throw a dart at a map of emerging markets and be almost assured of hitting a country in the grips of some sort of political crisis," writes Robert Burgess on Bloomberg. "Hong Kong, Turkey, South Africa, Chile, Lebanon and Ecuador" are only the start of the list.

In addition to localised turmoil, emerging economies are being squeezed by more general factors. One is the long-lasting strength of the US dollar. The trans-Pacific trade war has also dampened the outlook for Asia's trade-dependent economies. The result has been a less than vintage year. The MSCI Emerging Markets Index is up just over 7% for the year to date, significantly underperforming the global market average gain of about 18%. As Michael Mackenzie puts it in the Financial Times, "while US equities have doubled in value since mid-2007, emerging markets have effectively gone nowhere."

Contrarian opportunity

The "perennial fear" with emerging markets is that they are "crisis-prone", writes Buttonwood in The Economist. Just look at Argentina (see left). Yet as a group they are actually "much less brittle" than in the past. Most emerging markets today boast robust currency regimes and relatively low inflation. The average emerging market public debt of 54% of GDP is half that of the developed world.

That gives governments fiscal room to stimulate when things turn down, says Louis Gave of Gavekal Research. What's more, many central banks are cutting interest rates and governments everywhere from Brazil to India to Indonesia are working on much-needed structural reforms. That makes for "stimulus on the fiscal side, stimulus on the regulatory side, and stimulus on the monetary policy front". China has been the undisputed growth star this century (see page 24). Now it could be the turn of other emerging markets.

On a cyclically adjusted price/earnings ratio of about 14.8, emerging markets trade on a marked discount to the developed world average of 24.5 and are much cheaper than the 29.4 valuation of the US market. Nathan Rothschild is said to have counselled during the Napoleonic wars to "buy on the cannons, sell on the trumpets", says Johnson. Ignoring the scary headlines and buying "could pay off if deployed today".

Recommended

I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets
Stockmarkets

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
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021
How to invest in Africa as it takes its place in the post-pandemic sun
Emerging markets

How to invest in Africa as it takes its place in the post-pandemic sun

The African Continental Free Trade Agreement has come into force. Favourable demographics, improving governance and a growing technology sector also b…
14 Jan 2021

Most Popular

A simple way to profit from the next big trend change in the markets
Investment strategy

A simple way to profit from the next big trend change in the markets

Change is coming to the markets as the tech-stock bull market of the 2010s is replaced by a new cycle of rising commodity prices. John Stepek explains…
14 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Here’s why markets have shrugged off the US political turmoil
Investment strategy

Here’s why markets have shrugged off the US political turmoil

Despite all the current political shenanigans in the US, markets couldn’t seem to care less. John Stepek explains why, and what it means for your mone…
7 Jan 2021
Free 6 issue trial then continue to