- Emerging market equities performance kinder to commodity-producing/-exporting markets
- Domestic political risks have generally diminished
- Despite low funding costs, infrastructure spending remains disappointing
Emerging market equities have had a good year so far despite a negative start to 2016 marked by concerns about China and the yuan. The MSCI Emerging Markets Index (MXEF) has returned 16.0% year-to-date. However, trends in EM equities have been divergent, with Latin America and EMEA (Europe, the Middle East, and Africa) issues sharply outperforming the rest of the EMs. While the energy- and resource-heavy markets rallied, equity markets in the energy- and commodity-consuming EM economies remained laggards.
We have seen encouraging signs of domestic political stability in EM markets. Ratification of a new constitution in Thailand (and a switch of the chief opposition party towards the present administration is reassuring) in terms of the continuity of the present regime. However, the recent death of King Bhumibol may have political repercussions, and we will continue to monitor the region closely. In the Philippines, the recently elected president (Rodrigo Duterte) has historically high approval ratings, his loose cannon status notwithstanding. We are encouraged by the Philippine government’s economic agenda and plans for reform. There is improved political and policy stability in China and India. We believe the political stability in EM Asia keeps the policy environment conducive to continued economic reforms and growth.
In a growth-challenged global environment of negative yields, passive flows have supported EMs so far, helping Asia outperform the other regions in the second half of 2016. There is indeed some modest improvement in EM Asia’s forward earnings estimates (about 4.5% from the end of last quarter according to MSCI), which somewhat justifies the improved equity market performance. The continued tepid earnings growth effect is, in a way, dampened by a 13.0% decline in the largest constituent’s (China’s) forward earnings expectations.
We continue to believe that the region’s consumption demand will remain resilient, and our focus remains on companies that can benefit. Asia Ex-Japan continues to grow stronger than the rest of the world (at about 5.0% to 6.0% in both 2016 and 2017), led by India, China, and the Philippines; the growth in our key markets remains enviable. Latin America is expected to see a decline of 1.3% in GDP for 2016 and an increase of 1.9% in 2017 (according to Bloomberg).
All returns cited are in USD. Index returns include the reinvestment of dividends.
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There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems, than developed markets.
Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.
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Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
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No investment strategy can guarantee a profit or protect against loss in periods of declining values. There is no guarantee that the Fund’s income will be exempt from federal or state income taxes. Capital gains, if any, are subject to capital gains tax. Income from municipal bonds may be subject to the alternative minimum tax. Diversification does not protect against market loss.This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results.
The Standard & Poor’s (S&P) 500 Index represents 500 large U.S. companies. The comparative market index is not directly investable and is not adjusted to reflect expenses that the SEC requires to be reflected in the fund’s performance.
The U.S. Treasury 10-year note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.
Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
The Barclays U.S. Corporate High-Yield Index covers the U.S.-dollar-denominated, non-investment-grade, fixed-rate, taxable corporate bond market and includes securities with ratings by Moody’s, Fitch, and S&P of Ba1/BB+/BB+ or below.
The Barclays Emerging Markets USD Aggregate Bond Index is a flagship hard currency emerging markets debt benchmark that includes fixed- and floating-rate U.S. -dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers.
MSCI EM Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. Net total return indexes reinvest dividends after the deduction of withholding taxes, using (for international indexes) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.
MSCI EM Asia Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets. Net total return indexes reinvest dividends after the deduction of withholding taxes, using (for international indexes) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.
The MSCI EM EMEA (Europe, Middle East, and Africa) Index is a free-float‐adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of Europe, the Middle East, & Africa. The MSCI EM EMEA Index consists of the following 10 emerging market country indexes: Czech Republic, Greece, Hungary, Poland, Russia, Turkey, Egypt, South Africa, Qatar, and United Arab Emirates.
The MSCI Emerging Markets Latin America Index is a free-float‐adjusted market capitalization weighted index that is designed to measure the equity market performance of emerging markets in Latin America. The MSCI EM Latin America Index consists of the following five emerging market country indexes: Brazil, Chile, Colombia, Mexico, and Peru.
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