- Many EM indices outperform U.S. equities
- Earnings momentum positive for EM Asia stocks
- Oil prices, technical factors favor EM markets
We see brighter prospects ahead for Emerging Market equities despite widespread uncertainties in overseas markets with respect to U.S. policies on bilateral trade, immigration, and taxes.
The sharp selloff in EM assets that followed the U.S. elections gave way to a strong first quarter rally that saw EM indices, particularly EM Asian equities, significantly outpace the S&P 500. For example, while U.S. equities advanced 6.1% in the first quarter of 2017, Taiwan posted gains of 11.8%; Singapore, 13.5%; and South Korea, 16.9%. China and Mexico, supposedly headed for trouble with Trump, had gains of 12.9% and 16.0%, respectively (returns reflect MSCI indices in U.S. dollars).
We attribute this strength in EM markets to rising confidence in the overall EM growth outlook and strong earnings momentum. For example, the International Monetary Fund raised its EM growth outlook in January from 4.5% in 2017 to 4.8% by 2018, forecasting stable growth in China and growth acceleration in India and Southeast Asia.
Investor sentiment toward EMs is also benefiting from targeted fiscal stimulus by China, with China’s state-owned enterprises investing in and building railway projects in Malaysia, Indonesia, and the Philippines. EM economies, which are net oil importers, are also getting a boost from lower energy costs, with higher than expected U.S stockpiles keeping a lid on crude oil prices. Also, on a technical basis, the general underperformance of EM equities versus U.S. equities over the past few years has enhanced the possibility of mean-reversion trades that particularly favor EM Asian equities.
Many investors believe that protectionist moves such as America’s abandonment of the Trans-Pacific Partnership (TPP) may hurt the U.S. more than its Asian counterparts, because China and other Asia-Pacific Rim countries now have the opportunity to pursue aggressive trade and economic cooperation through the Regional Comprehensive Economic Partnership (RCEP) agreement. The RCEP is a proposed multilateral free trade agreement between China and 15 other Asian nations.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.
Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.
Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.
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.
Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy and market risk. Investors of MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Income Tax).
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible. Investments in below-investment-grade debt securities which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.
Investments in emerging market 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 market bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
Yield to Worst is the lower of the yield to maturity or the yield to call. It is essentially the lowest potential rate of return for a bond, excluding delinquency or default.
As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk. Past performance is no guarantee of future performance.
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 Industrial Production Index (IPI) is an economic indicator that is released monthly by the Federal Reserve Board. The indicator measures the amount of output from the manufacturing, mining, electric, and gas industries.
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 U.S. REIT Index is a free float-adjusted market capitalization that is comprised of equity REITs. The index is based on MSCI USA Investable Market Index (IMI) its parent index which captures large, mid and small caps securities.
Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.