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Is the recent emerging market decline terminal?

June 2018

Emerging markets have suffered over the past few months, as the Dollar has strengthened and US bond yields have risen. 

  • The MSCI Emerging markets has dipped 6% over the past 3 months
  • South Africa, Turkey and Brazil have been particularly hard hit in US Dollar terms.
  • There are problems, but not all countries are impacted

It has been a noticeably tougher time in emerging markets in recent weeks. Laid low by the stronger dollar, the MSCI Emerging markets has dipped 6% over the past 3 months. This has come as a shock to many asset allocators who, at the start of the year, considered it to be one of the key remaining areas of value. Is the prognosis terminal or can EM revive from here?

While there are never any ‘sure things’ in investment markets, at the start of the year, emerging markets looked like a compelling option. Growth was faster, valuations were lower and there appeared to be good momentum developing. EM stock markets shrugged off wider equity market volatility with equanimity. It looked for a moment like they may be able to decouple from the problems of the wider global economy.

However, they did not prove immune to a rising Dollar and higher US bond yields. Since February, there has been a widespread sell-off in emerging market currencies. Equities have not been immune and the markets of South Africa, Turkey and Brazil have been particularly hard hit in US Dollar terms.

What is the outlook from here? Sergio Trigo Paz, Head of Emerging Markets Portfolio Management at BlackRock is clear that emerging markets are now in a better place. While valuations had started to look a little frothy as a result of the wall of money that hit at the start of the year, the recent sell-off has seen them move to more reasonable levels. At the same time, he says, fundamentals look good. Emerging market economies are still growing and reform continues.    

However, discernment is important and he has been taking down the ‘beta’ positioning on the group’s portfolios, favouring higher conviction holdings.  Markus Stadlmann, chief investment officer at Lloyds Bank Private Banking, agrees that investors need to be selective. He adds: “Foreign investment into emerging markets countries is one of the main drivers in their economic prosperity, and therefore stock market performance. It is crucial to understand which countries are receiving inflows of foreign investment and those that are experiencing outflows. 

“We have determined that as a whole, emerging markets are experiencing an outflow currently but these flows are concentrated around Argentina, South Africa, Colombia, Egypt, Mexico and Indonesia. On the other hand, South Korea, Taiwan and Poland could be attractive for long-term investors.”

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