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.

China’s economy is less commodity-intensive than in the 2000s

Financial markets are “getting ahead of themselves”, says Michael Mackenzie in the Financial Times. The ink had barely dried on the US-China trade deal (see here for more on that) before the bulls were pouring into emerging markets. Traders have noticed that the value of China’s renminbi has been “quietly” appreciating relative to the dollar. Stronger local currencies improve dollar-denominated returns. With US assets so expensive many are keen for a “prolonged rotation” towards emerging markets, which have “long been cheap”. 

Yet “truces can be fragile”. Details of the deal could also prove a mixed blessing. Brazilian soy farmers, for example, are unlikely to be thrilled by Chinese plans to shift purchases of the foodstuff to the northern hemisphere. A key challenge for emerging countries this decade has been China’s economy, says The Economist.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

China's exceptional growth in the early 2000s “pulled commodity-exporters” along for the ride. But today it is “less commodity-intensive”, bad news for the exporters who had come to rely on Chinese growth. Still, in other developing economies productivity growth continues to converge with that of the rich world. Talk of the end of emerging market catch-up growth appears to have been greatly exaggerated. 

Emerging markets have been in a “nine-year bear market” since peaking in 2011, says Andrew Addison in Barron’s. But long cycles of underperformance are usually followed by periods of outperformance and the asset class has been picking up steam relative to the S&P 500 index since the end of last year. More importantly for long-term investors, on a cyclically adjusted price/earnings ratio (Cape) of 15.8, emerging markets are far-cheaper than the developed world average of 25.7.

Advertisement

Recommended

Visit/519872/beware-the-hidden-risks-when-investing-in-emerging-markets
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
Visit/517688/the-british-equity-market-is-shrinking
Stockmarkets

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
Visit/517395/emerging-markets-buy-when-the-news-is-bad
Emerging markets

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.
5 Nov 2019
Visit/514936/emerging-markets-bounce-back-after-a-miserable-few-months
Features

Emerging markets bounce back after a miserable few months

Investors in emerging markets have been enjoying some long-awaited relief after a miserable few months.
13 Sep 2019

Most Popular

Visit/investments/property/601081/three-things-matter-for-the-uk-housing-market-now-and
Property

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020
Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

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
Visit/investments/stockmarkets/601101/has-the-stockmarket-hit-rock-bottom-yet
Stockmarkets

Has the stockmarket hit rock bottom yet?

The world's stockmarkets continue on their wild and disorientating rollercoaster ride. Investors are still gripped by fear. So, asks John Stepek, have…
2 Apr 2020
Visit/economy/small-business/601073/furlough-what-does-it-mean-and-how-does-it-affect-me
Small business

Furlough: what does it mean and how does it affect me?

Many companies have “furloughed” employees after they have shut down because of the coronavirus. But what does furlough mean and how does the scheme w…
30 Mar 2020