Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Emerging-Market Rally Has Legs

By Cumberland Advisors (Bill Witherell)ETFsAug 25, 2017 02:47PM ET
www.investing.com/analysis/emergingmarket-rally-has-legs-200209658
Emerging-Market Rally Has Legs
By Cumberland Advisors (Bill Witherell)   |  Aug 25, 2017 02:47PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Emerging-market equities are continuing to outperform remarkably this year. While a pullback seems overdue, there are a number of reasons to expect the trend to remain upward, perhaps for several years more. The iShares MSCI Emerging Markets ETF, (NYSE:EEM), is up 28.19% year-to-date August 24. The Vanguard FTSE Emerging Markets ETF, (NYSE:VWO), has gained somewhat less, 23.48%. The main reason for the difference is that VWO tracks an index that excludes South Korea, considering that country to have gained developed-country status, whereas the index tracked by EEM includes South Korea with a significant weight, 15.55%. Despite the geopolitical risk on the Korean peninsula, the iShares MSCI South Korea Capped ETF, (NYSE:EWY), has registered a gain of 29.37% year-to-date. The above gains compare favorably with the year-to-date gains of the global iShares MSCI All Countries ETF, (NASDAQ:ACWI), 14.14%, the iShares MSCI All Countries ex US ETF, (NASDAQ:ACWX), 18.59% and the US market as measured by the SPDR S&P 500 ETF, (NYSE:SPY), 10.16%. All returns are on a total return basis.

The macroeconomic underpinnings of the equity-market rally in emerging-market economies are strong. In its July 2017 World Economic Outlook, the IMF projects the growth of emerging-market and developing economies, measured as real GDP, to be 4.6% this year and 4.8% in 2018, compared with 4.3% in 2016. These calculations are dominated by the emerging-market economies, which are much larger than the developing economies. Indeed, the OECD’s June Economic Outlook includes growth estimates for 2017 and 2018 of 4.6% and 4.8% for the seven G20 countries that are not members of the OECD (Argentina, Brazil, China, India, Indonesia, Russia, South Africa, and Turkey).

China’s economy is expected to slow slightly in 2018, from 6.7% growth to 6.4%, due to a carefully managed monetary tightening designed to restrict non-bank lending through China’s “shadow” financial system. Offsetting this, the economies of India, Indonesia, Brazil, Argentina, Russia, South Africa, along with those of the OECD members Korea, Chile and Mexico, are expected to register stronger growth next year.

Structural Strength

Emerging-market economies have become stronger structurally over the past several years. Their exchange rates have become more flexible, thereby making the economies more resilient to external shocks. Levels of foreign exchange debt and current account deficits are lower, while foreign exchange reserves are higher. Reforms in India, China, and Indonesia have moved in the direction of better balancing those economies, while Brazil’s reforms are still very much a work in progress. Conditions for commodity exporters are gradually improving. The main risks to this positive outlook are adverse geopolitical developments, extended policy uncertainty in the US, Brexit-related developments in Europe, increased protectionism that impacts trade and global supply chains and a more rapid than expected moderation of central-bank stimulus.

The latest leading indicators are sending a mixed message. OECD’s Composite Leading Indicators for June, published August 8, indicate “growth gaining momentum” for China and Brazil, “stable growth momentum” for India and “tentative signs of easing growth” for Russia. The Caixin China Composite PMI Output Index for July also showed an improvement, reaching a four-month high at 51.9, while the PMI for Russia sank to a ten-month low. India’s PMI declined sharply, apparently due to a new sales tax and Brazil’s PMI continued to show contraction (a reading below 50%).

Emerging-market valuations continue to have an edge over those of the developed markets, despite the price increases that have been registered. The price-to-book ratio for MSCI EM equities is 1.66, still below the long-run average of 1.8. Their price-to-earnings ratio is 16.06, compared to its average of 24.2 and those of developed markets (24.11 for the S&P 500 ETF, SPY, and 23.59 for the iShares MSCI Eurozone ETF, (NYSE:EZU). Along with the positive growth outlook summarized above, an important reason for expecting this emerging-market rally to continue is that these markets are still recovering from their lows of early 2016.

Asia-Pacific And Latin American

We are favoring the Asia-Pacific and Latin American emerging markets in our International Portfolio. Together they account for 84% of the MSCI EM equity index, with Asia-Pacific and its very large equity markets alone amounting to over 72.6% of this capital-weighted measure. The iShares MSCI Emerging Markets Asia ETF, (NASDAQ:EEMA), is up 32.66% year-to date August 24. Within that region the iShares MSCI China ETF, (NASDAQ:MCHI), is up 41.27%. Even more remarkable, the PowerShares Golden Dragon China Portfolio ETF, (NASDAQ:PGJ), has gained 50.42% so far this year. It invests solely in US-listed companies that derive a majority of their revenues in China. This means its holdings are mainly in internet software and services, internet and direct marketing retail, and education services and not in the large banks found in other China large-cap ETFs. India also is an important market in the region. Its reform-oriented government is making much-needed changes. The iShares MSCI India ETF, (NYSE:INDA), has gained 26.90% year-to-date.

The Latin America region’s equity markets are dominated by those of Brazil, Mexico, and Chile. The iShares Latin America 40 ETF, (NYSE:ILF), which tracks an index of 40 of the largest firms in the region, is up 27.26%. While the ETF for the largest LA equity market, the iShares MSCI Brazil Capped, (NYSE:EWZ), has gained a more modest 21.89% as the Brazilian economy slowly recovers from recession and continues to experience political turmoil, Mexico’s equity market, despite the threats from Trump, continues to impress, with the iShares MSCI Mexico Capped ETF, (NYSE:EWW), bouncing 31.73% so far this year. The smaller but robust Chilean market is rebounding from its June pullback, with the iShares MSCI Chile Capped ETF, (NYSE:ECH), still managing a 28.50% gain for the year to date.

Outside these two regions we are watching with interest the steady gains of the Polish market, as the Polish economy profits from its close relations with the Eurozone’s powerhouse, Germany. The iShares MSCI Poland Capped ETF, (NYSE:EPOL), is up an impressive 46.58% year-to-date.

In sum: equity investors who were positioned in the emerging markets at the beginning of 2017 should be seeing very attractive gains thus far this year. There are reasons to think this rally may still have some legs. Market pullbacks, therefore, may provide entry points. The historically higher volatility of these markets and their vulnerability to “risk-off” market swings should be kept in mind.

Sources: Ned Davis Research; ETF.com; IMF World Economic Outlook Update, July 24, 2017; OECD Composite Leading Indicators news release, August 8, 2017; OECD Economic Outlook, June 2017; Goldman Sachs (NYSE:GS) Economic Research; Oxford Economics; the Financial Times; and markit.com/commentary/economics.

Emerging-Market Rally Has Legs
 

Related Articles

Emerging-Market Rally Has Legs

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email