For those investing online with diversified portfolio exposure to emerging markets, 2018 was a tough year. The broad basket of equities markets which covers stock exchanges from China and South America to South Korea and South Africa fell by almost 25%. Currency troubles in Turkey and Argentina combined with a strong dollar, general ‘risk off’ international investor sentiment and signs of an economic slowdown in China to route the sector.
However, 2019 has so far seen emerging markets bounce back strongly – up around 13% to date. Analysts such as Will Denyer and Udith Sikand of Gavekal Research are putting the new found enthusiasm for emerging markets down to a reversal of dollar liquidity in financial markets. However, with the Fed having paused both interest rate hikes and quantitative easing tightening for now and the ECB remaining ‘dovish’, is expected that liquidity will be ‘abundant’ over the remainder of 2019. And that should be good news for emerging markets.
Another factor that should keep emerging markets on track to extend the positive first quarter performance over the next several months is Beijing’s latest stimulus package for the Chinese economy. Trade tensions with the U.S. also appear to have eased since their zenith last autumn and growth prospects in other big emerging markets economies such as India and Brazil also look solid. Investment bank Morgan Stanley is forecasting GDP growth to average 5% by the end of the year across the countries that make up the diverse emerging markets group. That’s a significant improvement on the 4.3% growth over 2019’s first quarter.
After 2018’s emerging markets bear run, valuations also still look attractively discounted. Combined with a general uptick in risk sentiment that should keep capital flowing back to the asset class. Other factors improving across emerging markets are the state of governance and national balance sheets that look more robust after many countries introduced new rules on government borrowing and spending.
The economic drivers in emerging market economies and stock markets have also changed over the past several years. There has been a shift in the balance away from volatile commodities to technology and consumption. In 2008 commodities-driven stocks accounted for 40% of emerging markets. That’s dropped to 15% today with the technology and consumer sectors now combining at over 40%, adding greater diversity to the economic mix.