With global investors moving on following excitement over U.S and then European equities, an increased appetite for emerging markets has grown in recent months.
Since 2017 began, there has been a surge of almost 24 percent in the MSCI Emerging Market Index. But investors appear to be slowly shifting elsewhere because European companies are set to get hurt due to dollar weakness and consequently a strong euro.
“I actually think that it’s more likely that investors will shift towards emerging markets … Where valuations are much more attractive,” James Butterfill, head of research and investment strategy at ETF Securities said, noting that U.S. stocks are too expensive.
With the economic improvements seen in the euro zone, the election of Emmanuel Macron in France and the dissipation of the populist threat across Europe, interest for European equities spiked in the first half of the year. But recently, a strong euro is likely to impact profits even as there’s been some patchy earnings reports. According to Reuters, 49.4 percent of the 156 companies in the pan-European STOXX 600 that had reported earnings for the second quarter, reported results exceeding analyst estimates as of August 1. In comparison, 50 percent beat analyst estimates in a typical quarter.
On expectations of big infrastructure investments and tax cuts by the new administrations, U.S. equities have also been on the rise. However, asset managers are still wary of valuations on Wall Street and President Donald Trump has yet to fully concrete any of these proposals. As such, the next sweet spot for money managers could be the emerging markets.
“Investors are starting to see fundamentals way more attractive in emerging markets,” Butterfill noted.
“We’re not going to see the taper tantrum that we saw 2013,” he added, saying that emerging markets no longer have current account deficits. It indicates that the value of the goods and services a country exports are less than the value of the goods and services the country imports.
Analysts note that EMs are at a stronger position than they were in 2013 and the markets have also priced in the expected Fed moves even as the U.S. central bank is continuing to tighten its monetary policy – now with rate hikes.
“Even with tightening in the U.S., interest rate differentials are still positive for emerging markets,” Zsolt Papp, EMD client portfolio manager at JPMorgan Asset Management, said.
“Emerging market economies are well placed to absorb the higher U.S. rates. Fed tightening comes in the context of stronger domestic U.S. and EM growth conditions and with EM economies in a substantially better fundamental position versus 2013’s taper tantrum episode,” he explained.
Higher growth and lower inflation, apart from stronger current accounts, as other positive factors in Ems, analysts have mentioned.
In the first quarter of this year, strong investment spending and exports have boosted growth in EM countries, according to data compiled by Pictet Asset Management. And in comparison with 4 percent in the previous quarter, gross domestic product reached an average 4.3 percent across these countries.
“EM growth has reached its fastest pace since the third quarter of 2014. The one concern for investors could be private consumption growth, which was flat over the first quarter,” Pictet Asset Management said in a research note. However, given stronger consumer confidence, lower unemployment rates and nominal wage growth it sees this metric moving higher, it added.
Pictet also noted that since December 1993, consumer confidence is at its highest level.
(Adapted from CNBC)