Latest from the Quantamize Blog

Emerging Markets' Time May Have Come

Jul 18, 2018



Three of the world’s most influential money managers, BlackRock Inc., Goldman Sachs Group Inc., and Franklin Templeton Investments are all expecting an upcoming rally in emerging markets equities.  They cite strong fundamentals, rising corporate profits, and cheap prices overshadowing risks such as a rising interest rates and a “tit-for-tat” trade war. 

Emerging markets equities and currencies are experiencing selloff right now, which according to a Bloomberg study, the majority of investors, traders, and strategists believe will continue. Investors are also at their highest levels of pessimism in over 20 years towards developing-nation stocks. Bank of America Merrill Lynch’s (BAML) most recent fund manager survey illustrates that shorts on emerging-market equities have reappeared on their most “crowded” trades list.  Despite this general negative perception, some think this presents an attractive entrance point.  BAML strategist Ritesh Samadhiya believes that pessimism like this is “normally a sign to increase exposure, not reduce it.” As challenges like a strengthening dollar and these trade tensions are usually harmful to emerging markets, they shouldn’t hinder equity performance for much longer.

The last time the consensus surrounding these emerging-market stocks was overwhelmingly negative and emerging-market shorts became the most crowded trade in March 2016, these equities began to rally.  Finding the floor after declines like these always proves to be difficult, but investors should start looking for one, perhaps in the short-term.  After their deepest dives of the year, emerging markets stocks have returned on average 32% within the following year, according to SunTrust Private Wealth. More specifically, if someone bought the MSCI Emerging Markets Index in April 2016, they could have returned ~60% if they sold this past January.

But even since then, long positions in emerging markets have started to become more popular, showcasing a growing bullish sentiment.  Bloomberg illustrates several pieces of information backing up the bulls.

  1. After a year’s deepest selloff, emerging markets stocks have rallied with double-digit returns
  2. Developing nations’ trade competitiveness is at the same level as the beginning of the 2016 EM rally
  3. Sharp USD$ rallies usually last three-eight months, and our current one is five months in
  4. The slump in the number of expanding developing economies (since February) usually rebounds fairly quickly
  5. The performance of emerging-markets stocks vs. U.S. Large Cap stocks is nearing a threshold of -17%, one not breached since the 2008 financial crisis