Emerging market stocks fall behind the developed world

The “lost decade” in emerging markets isn’t over yet, say Srinivasan Sivabalan and Netty Idayu Ismail on Bloomberg. The benchmark MSCI EM index has gained “a paltry 14%” since October 2010, compared to the S&P 500’s near-300% rise over the same period. It has also trailed Europe and Japan. 

Foreign investors pulled $90bn out of emerging-market debt and equities in March last year, says Jonathan Wheatley in the Financial Times. The emergency money central banks poured into the global system has since prompted a return: “Almost $790bn has flooded back” into emerging markets since April 2020. The flood of easy money depressed yields in developed markets, encouraging investors to go further afield.

Now tighter US monetary policy could put that process into reverse, triggering a repeat of the 2013 “taper tantrum”, when fears of tightening US monetary policy caused a disruptive sell-off in EM stocks and currencies. The MSCI emerging market index is down this year, while developed markets have rallied, say Sivabalan and Ismail. The ratio between emerging markets and US shares is at a 20-year low. EM stocks trade on roughly a 40% discount to their US peers on a price/earnings (p/e) ratio basis, but “a poorer earnings outlook is discouraging investors from buying into that discount”. 

Investors may spy a bargain, but beware, says Chris Dillow in the Investors’ Chronicle. Tighter US monetary policy and a stronger dollar will put stress on companies in the developing world that have borrowed in greenbacks. Some point to the long-term growth prospects of these economies. Yet “[the] link between... growth and equity returns is weak”. Chinese GDP has soared since 1998, but investors would have done better investing in French or Danish stocks over that period.