Emerging market stocks: buy the "Asian Century"

The news just keeps getting worse in emerging markets, says Reshma Kapadia in Barron’s. Capital outflows from emerging markets outside China surpassed those seen during the global financial crisis in March. The iShares MSCI Emerging Markets exchange-traded fund (ETF) has fallen by a fifth this year.

With oil prices slumping the commodity currencies have been hardest hit. The Brazilian real is down 32% against the dollar this year and the Russian rouble 19%. Mexico, meanwhile, is heavily exposed to the US downturn; the peso has slumped by 29%.

Energy importers of Asia have not been spared, says the Financial Times. Foreign investors pulled $26bn from Malaysian, Philippine, Thai, Indonesian and South Korean stocks for the year to 14 April. Foreign investors also withdrew a record $16bn from India in March, “more than during all of 2008”.

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“Now is the time”

Yet some spy long-term upside, says John Authers on Bloomberg. On a cyclically adjusted price/earnings basis, shares in the asset class look “almost as inexpensive as they have ever been”. Asset manager GMO recently published its regular seven-year forecast for investment returns. While it is bearish on cash, bonds and developed market equities, it predicts gains of more than 11% a year for emerging-market value stocks. As GMO’s Ben Inker puts it, “now is the time” to top up.

History suggests that buying into emerging economies “just as oil hits a catastrophic low and the world enters a major recession” can prove astute, says Authers. In the five years after oil prices last fell below $20/barrel – in November 2001 – the “Bric” index of Brazil, Russia, India and China delivered “ballistic returns”.

Historical comparisons can only take us so far, says Buttonwood in The Economist. If society is indeed “changed radically” by the pandemic, then “it may be in ways that are hard to imagine today”. Still, most portfolios have plenty of exposure to the developed world and the dollar. Those looking to diversify for an uncertain decade ahead should look at emerging markets. And for all the focus on politically volatile commodity producers, more than two thirds of the MSCI Emerging Markets index is comprised of emerging Asia, economies that are often “fairly rich and well run”.

The Covid-19 pandemic aside, the long-term case for emerging Asia remains sound, thanks to demographics and reform-minded governments, says Teera Chanpongsang of Fidelity International. “By 2030, two thirds of the global middle class are likely to be Asian.” Investment portfolios will be increasingly weighted towards Asia-Pacific as the region’s economies expand and mature. “The ‘Asian Century’ is in full swing.”