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Emerging markets: have investors missed the boat?

Emerging markets have had a strong run – are all the strong returns behind them?

  • Emerging markets have rallied after fears surrounding the Trump election abated
  • After 20%+ gains, investors may worry that they have missed the boat
  • There are risks, but valuations look more compelling than for developed markets

A year ago, and just after President Trump’s election, it was comfortably predicted that emerging markets were on the rocks. After 10 years in the doldrums, markets that relied on importing to the US, notably Mexico and parts of Asia, would suffer as Trump sought to repatriate manufacturing. The Dollar would strengthen on the back of tax cuts and infrastructure spending, and the outlook for emerging markets would be grim.

What a different a year makes. The average Global Emerging Markets fund is up over 20% over the past 12 months. President Trump been a little quieter on onshoring manufacturing after US companies made clear their reluctance to see huge hikes in their cost bases. At the same time, the Dollar has weakened and those promised tax cuts and infrastructure spending are looking increasingly unlikely.

But have investors missed the boat? China has been a key swing factor – its monetary stimulus has boosted commodity prices, which in turn have boosted growth in key markets such as Russia and Brazil. It is widely thought that policymakers have sought to boost the economy ahead of the new People’s Congress and a tricky transition, and this stimulus may start to be withdrawn.

There is also the problem of stimulus being withdrawn elsewhere – the US has said it will pare back stimulus from October. Emerging markets are always vulnerable to global liquidity conditions.

Nevertheless, emerging markets look better value than their developed peers, and for the most part are at a different stage in the economic cycle. Recovery is just starting in places such as Brazil. India is seeing important reforms, which should give it long term economic strength.

However, there is no doubt that emerging markets offer a level of growth in certain industries that cannot be obtained elsewhere; the growth in air travel, for example, or mortgage penetration. They also offer access to companies dominant in their field at a much cheaper price than is available in the US market. Greenberg points out that ecommerce is stronger in China than it is in the US, yet key Chinese ecommerce names – Alibaba, for example - trade more cheaply than their US equivalents.

This suggests there may be more to go for in emerging markets. While it would have been good to have discovered them 18m ago, there are still opportunities.

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