Emerg­ing mar­kets are climb­ing back from the dead

Daily Local News (West Chester, PA) - - BUSINESS - By Stan Choe AP Busi­ness Writer

Stocks and bonds from Thai­land, In­done­sia and other de­vel­op­ing economies are emerg­ing from their bur­row.

Af­ter rank­ing as some of the world’s worst in­vest­ments the last few years, emerg­ing mar­kets have pro­duced some of the best re­turns of 2016. Gains have been so big for Brazil­ian bank Banco Brade­sco, Chi­nese tech­nol­ogy gi­ant Ten­cent and emerg­ing-mar­ket stocks in gen­eral that the av­er­age mu­tual fund in­vested in them has re­turned 11.5 per­cent this year. That’s roughly dou­ble the re­turn of S&P 500 index funds. Re­turns for emerg­ing-mar­ket bond funds, mean­while, have been even higher, at 12.1 per­cent, through Wednes­day.

Of course, the big gains mean emerg­ing-mar­ket in­vest­ments have clawed back only a por­tion of their big­ger losses from prior years. The largest such mu­tual fund by as­sets, Van­guard’s Emerg­ing Mar­kets Stock Index fund, is still down 12.4 per­cent from two years ago, even af­ter in­clud­ing div­i­dends. Many risks also still hang over emerg­ing-mar­ket in­vest­ments, not least of which is a his­tory of fol­low­ing big swings up in price with big swings down. It’s a no­to­ri­ously volatile cor­ner of the mar­ket, but mu­tu­al­fund man­agers and an­a­lysts say they see rea­son for con­tin­ued gains.

In­vestors are buy­ing in. They plowed nearly $13 bil­lion into emerg­ing-mar­kets stock funds in the first seven months of this year, with roughly half of that com­ing in July alone. They’ve also put $5.5 bil­lion into emerg­ing-mar­ket bond funds, a sharp re­ver­sal from last year, when they with­drew nearly $10 bil­lion.

The dol­lars are mov­ing at a time when in­vestors and fund man­agers see U.S. stocks near record highs and Trea­sury yields close to record lows and won­der how much more re­turn, if any, can be squeezed from them.

“In­vestors are run­ning out of places to go and giv­ing lag­gards a chance,” notes Brian Nick, chief in­vest­ment strate­gist of TIAA In­vest­ments.

If the grow­ing de­mand for emerg­ing-mar­ket stocks and bonds turns into a mass mi­gra­tion, it would be only the lat­est flip of the switch for global in­vestors. Be­fore the global fi­nan­cial cri­sis in 2008, emerg­ing mar­kets were some of the hottest in­vest­ments. Led by an as­cen­dant China, their economies were grow­ing faster than the rest of the world and seemed more dy­namic. But emerg­ing-mar­ket stocks fell more sharply in the af­ter­math of the fi­nan­cial cri­sis. As re­cently as the start of this year, wor­ries were flar­ing that China wouldn’t be able to man­age its slow­down in growth.

Among the en­cour­ag­ing signs an­a­lysts cite for emerg­ing mar­kets now are: • Bet­ter bar­gains Fund man­agers say noth­ing in the world looks cheap, but stocks from de­vel­op­ing economies look less ex­pen­sive than stocks in the U.S. and other ar­eas of the world.

An­a­lysts often mea­sure how ex­pen­sive a com­pany is by mea­sur­ing its stock price against how much profit it makes. By that mea­sure, emerg­ing-mar­ket stocks re­cently were about 15 per­cent cheaper than their de­vel­oped-mar­ket coun­ter­parts, ac­cord­ing to Credit Suisse. • Greater growth Economies around the world have been stuck in a slow-growth re­cov­ery since the fi­nan­cial cri­sis. The U.S., Ger­man and other ad­vanced economies will likely see growth tick down to 1.8 per­cent this year and then stay there in 2017, ac­cord­ing to the lat­est fore­cast from the In­ter­na­tional Mone­tary Fund.

At the same time the IMF down­graded its fore­cast for ad­vanced economies, it left its es­ti­mates alone for emerg­ing mar­kets. It’s call­ing for eco­nomic growth to ac­cel­er­ate slightly this year to 4.1 per­cent and then to pick up again next year to 4.6 per­cent.

At the same time, bonds from emerg­ing mar­kets are of­fer­ing higher yields than U.S. Trea­surys, which are close to record lows, and bonds from Europe and Ja­pan, which can have yields of less than zero. • Lower-for-longer rates Ex­pec­ta­tions are ris­ing that the Fed­eral Re­serve will raise in­ter­est rates only slowly. A jump in rates would not only drag down the value of emerg­ing-mar­ket cur­ren­cies, it would also likely re­sult in less for­eign in­vest­ment in emerg­ing mar­kets. The dol­lar has slowed its as­cent this year.

Of course, risks re­main for any­one con­sid­er­ing in­vest­ing in emerg­ing mar­kets. In­vestors are al­ways cau­tious about po­lit­i­cal sta­bil­ity in coun­tries like Rus­sia. China is still fac­ing a chal­leng­ing slow­down in its eco­nomic growth. And a quick round of rate hikes by the Fed­eral Re­serve could un­ravel things.

But many fund man­agers say they ex­pect in­ter­est to con­tinue de­spite the risks.

“Two things have been very scarce in the world: in­come and growth,” says Richard Turnill, global chief in­vest­ment strate­gist for Black­Rock. “And emerg­ing mar­kets are an area that po­ten­tially of­fers both.”

MARK LENNIHAN- THE ASSOCIATED PRESS

Amer­i­can flags fly at the New York Stock Ex­change on Wall Street.

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