Emerging markets have long held promise and potential, but the returns offered by equities don’t always match economic growth, frustrating investors along the way.
However, analysts have been upwardly revising earnings estimates on emerging-market companies faster than for those in developed countries. These factors could be signs that investors may want to deploy active management when allocating to developing economies.
“American investors are intrigued by emerging-markets stocks,” writes John Rekenthaler for Morningstar. “The reason for it is their economic prospects. The Asian Tigers of Hong Kong, Singapore, South Korea, and Taiwan have enjoyed remarkable development, to the point where many no longer consider those nations to be emerging. Attention has now turned to their successors: Brazil, Russia, India, China, and South Africa.”
The emerging market space has attracted the attention of some big money managers. For example, Ashmore Group Plc, JPMorgan Chase & Co. and UBS Group AG have all been supporting a bullish case for emerging-market equities so far in 2021, predicting the category to be a prime beneficiary of the post-coronavirus economic recovery process.
Optimistic Signs and a Word of Caution
Emerging markets equities are now turning higher, and many market participants are bullish on the prospects for the asset class to start 2021. Ongoing positive sentiment in the emerging market as an asset class has attracted greater attention among investors. Moreover, given the extended low-rate environment, many income seekers are turning to alternative sources of yield.
“Much of emerging markets’ performance arrived early. After the early 2000s, it’s not clear that emerging-markets stocks continued to outgain the S&P 500, nor that their total returns were particularly impressive. Their success appears to have been transient,” adds Rekenthaler.
While China might be deemed the safest bet, other funds are also churning out strong performances in the new year. Still, investors should be careful of embracing emerging markets equities simply because the asset class is attractively valued.
“A common justification for emerging markets’ recent struggles—if 13 years can be called ‘recent’—is that such issues have become unpopular,” concludes Rekenthaler. “By this explanation, the problem lies not with emerging markets’ businesses, but instead with reduced investor expectations. Emerging-markets stocks have become value investments. When they return to fashion, their price multiples will expand, permitting them to lead the way once again.”
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