Bullish investors return to emerging markets

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.

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.