The U.S. had two consecutive quarters of negative growth meeting the technical requirements of a recession, and for the first time in over 40 years that coincided with very high inflation. Tasked with generating high returns in a stagflation environment investors are turning to an odd place, emerging markets. While some EM has suffered as a result of a stronger dollar and Fed tightening, pockets are promising to bring big returns in higher growth environments abroad. Countries relying on exports will have a difficult time, but countries like India, Malaysia, and Indonesia all have fairly robust domestic consumer demand and are quick-growing economies. The last country is an oddball but China has continued to deliver stimulus throughout the pandemic and may put itself in a good position to capture investor attention.
Finsum: Equities abroad are ultra-low, finding the right countries with domestic consumer support could be very profitable.
Monetary policy is diverging in emerging markets with some countries keeping policy rates low and others beginning to tighten, and investors are beginning to make a ruling. Countries like Russia, Columbia and South Korea all experienced currency appreciation due to tighter policy, and certain investment classes are being rewarded. Bond markets are signaling a yield curve inversion in Russia, pricing in future rate hikes, but this has been okay for oil exports. While at the other end, Turkey saw its yield curve climb and its currency—the lira—perform poorly in October. There were mixed signals from Brazil, where the fiscal policy signaled lots of public spending. The monetary policy started to tighten to curb inflation, and as a result, markets punished the Brazilian real.
FINSUM: There are diverging schools of thought globally as to how to respond to the combination of the world’s energy crisis and the lingering Covid-19 pandemic.
(Rio de Janeiro)
The international monetary fund cut its growth projections globally this week. The advanced economies are still expected to keep pace, but the low-income developing countries are lagging. Many low-income countries are lagging in vaccine coverage and their exports are suffering because of this. These exports slowing led the IMF to cut the growth projection for Indonesia, Malaysia, Philippines, Thailand, and Vietnam from 4.3% to 2.9%. There is a slight trickle into larger economies as worker shortages have hurt American companies such as Nike. China remained robust to most of the slashes as its 2021 projection only dropped from 8.1% to 8.0%.
FINSUM: Don’t look for these growth projections to bear out in emerging markets if vaccine rates tick up. However, Fed tightening could slow growth in dollar-dependent countries.
(Rio de Janeiro)
Emerging markets make up a fraction of US investors' portfolios even though they account for a quarter of global stocks weighted by market value, and they are one of the most important tools to beat the markets moving forward. The biggest factor driving the divergence in emerging markets and US markets has definitely been earnings, which has pushed the gap to its widest levels in the last two decades. However, earnings aren’t the only component of stock valuation. Dividend growth is expected to double up on US markets with 3% as compared to 1.4-1.5% in the U.S. Meanwhile, emerging markets are trading at a ridiculous discount as their P/E is about 12x where the S&P 500 is an average of 20. The common ratio of P/E to expected earnings growth and dividend yield favors emerging markets, which is already assuming high earning growth for US stocks. Finally the last time the gap between emerging markets and U.S. stocks was this bad the EM went on to beat the S&P by 14% over the next 7 years.
FINSUM: This is the perfect opportunity to move abroad because presently the discount is just unjustified for emerging markets.
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