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Emerging Markets-Earnings Growth Fueling Potential

Feb 12, 2018

Emerging Markets-Earnings Growth Fueling Potential

Emerging market stocks have shown greater sensitivity to the recent global equity sell-off when compared to domestic stocks. As such, this may be an attractive entry point for investors seeking to diversify their portfolios with foreign assets. This theme is explored in-depth throughout a recent Barron’s article titled “Plotting a Course for Emerging Markets” authored by Craig Mellow. The iShares MSCI Emerging Markets ETF (EEM), designed to track the performance of an index encompassing various large and mid-cap emerging market equities, experienced a 12 percent decline over the nearly two-week period stretching from January 26th to February 8th. In comparison, the S&P 500 witnessed a 10 percent loss in valuation over the same time frame. In 2017 EEM, the iShares MSCI Emerging Markets ETF rose 37% while the S&P500 rose 22%, likely partially explaining the relative underperformance recently.


One of the key points explored in the article is the fact that while equity prices have fluctuated, fundamentals remain intact. An especially positive indicator is the widespread growth of emerging market corporate earnings over the past year, following 5 consecutive years of earnings contraction. Equity valuations may not yet have been able to fully adjust to the changing market conditions. Stocks that were fundamentally strong before recent declines have only added value with prices shifting downward.

The more severe sell-offs throughout emerging markets may have put many potential investors on edge when considering the long terms prospects available. This increased volatility, however, may be coupled with an increased wealth creation opportunity.

To read the entire Barron's article click here