Looking for Signs of Revival in ‘Slowing’ Emerging Markets
Since Jan 20, shares of cos based in rapidly growing economies like Brazil, the Philippines and Thailand have soared over 20%, double the gains of S&P’s 500-stock index
Paul J Lim
New York: For years, many investors have been pining for a rebound in emerging-market stocks, only to be frustrated by the slide in commodity prices, which still drive many developing economies. The situation appeared to improve in the first quarter.
After surviving another scare in January, crude oil prices rebounded about 40%, pulling up other commodities and emerging-market equities. Since January 20, shares of companies based in rapidly growing economies like Brazil, the Philippines and Thailand have soared more than 20%, double the gains of the Standard & Poor’s 500-stock index of domestic equities during that time.
Is the bear market in commodities and emerging-market stocks coming to an end? Not quite. Most economists say it could take years before a commodity “supercycle,” like the one that drove emerging-market stocks in the early 2000s, kicks in. Even if China, the world’s biggest consumer of industrial commodities, were to regain momentum — a big if — the global economy would still require years to work through excess capacity, many market strategists say.
Although commodities continue to be a drag, there are signs of subtle changes that make emerging-market stocks more appealing — at least more so than a year ago. “Coming into the year, there was this attitude: ‘Why take on additional volatility with emerging-market stocks when you can get better returns for less volatility in the developed world?'” said Laurence Taylor, a portfolio specialist who works with global equities at T. Rowe Price.
As it turned out, concerns about the slowing economy hit the developed markets harder than the developing world, as European stock funds lost 3.4% in the quarter versus a 4% average gain for diversified emerging market funds.
“That, perhaps, would be a catalyst for people to reassess their emerging-world thesis,” Taylor said.
So too would the surprising advances seen in many of the most worrisome economies — the fragile five nations of Turkey, India, Indonesia, South Africa and Brazil — which have improved their budget deficits, balance of trade and inflation outlook, he added.
And the Federal Reserve’s less aggressive stance on interest rates this year may reduce a major headwind for the emerging markets. At the end of last year, expectations were that the Fed would lift short-term interest rates four times in 2016, even as central banks abroad were still trying to stimulate growth.
Because higher rates curb risk-taking and strengthen the dollar, this was expected to have a negative effect on emergingmarket shares.
Yet the Fed chose not to lift rates at its March meeting. And given the central bank’s more conservative expectations for economic growth this year, Fed offici- als are hinting that rates will be increased only two times this year. “The change in tone represents more synchronicity with central banks in Japan, Europe and around the world,” said Michael Kass, manager of the Baron Emerging Markets fund. That could represent an opportunity in the developing world, money managers say, although this risky asset would merit caution.
Even assuming that emerging-market stocks will go back to being one of the best-performing asset classes, as was the case a decade ago, the countries that led the past rally might not lead a resurgence.
Consider that the BRIC countries — Brazil, Russia, India and China, which dominated emerging market funds a decade ago — gained more than 770% from 1999 through 2007. That’s more than double the returns for other emerging-market stocks. Yet since the financial crisis of 2008, BRIC stocks have lost a third of their value while the rest of the emerging markets have held their ground.
Then there is a valuation problem. “You can put emerging-markets stocks into a couple of buckets,” said Jonas M. Krumplys, co-manager of the Ivy Emerging Markets Equity fund. In one bucket are the commodity-driven economies of Latin America and Russia. In the other bucket are stocks based in economies that are increasingly being driven by domestic growth and rising consumer spending.
This includes markets like India, Indonesia, Mexico and the Philippines.
The problem is, stocks in the latter bucket — which investors favor — are trading at price-to-earnings ratios that are typically 50% or greater than shares based in the commodity bucket. “In the aggregate, the emerging markets look cheap relative to history,” said Scott Crawshaw, co-manager of the Harding Loevner Emerging Markets Portfolio fund. “But higher-quality areas of the market are trading at very different valuations that are more caught up in the commodities downdraft.”
—New York Times News Service