Emerging Market Investment Update

New struggle Emerging Markets Due to the recent swing Chinese stocks Some investors and analysts have found a tempting opportunity to bet that the pain of ten years may end soon.

Emerging stock markets such as Brazil, India, Turkey or South Africa have lagged far behind developed markets for most of the past decade, especially when compared to runaway US stock markets.

Refinitiv’s data shows that the total return of US blue chip stocks in the past 10 years was 356%, exceeding the return of European stocks of 188% in the same period. But the performance of emerging markets was even worse, with the MSCI Emerging Markets Index returning only 66%, leading some analysts to describe it as a “lost decade” Emerging Markets.

As investors bet on global economic recovery and soaring commodity prices, after the start of 2022, emerging market stock markets have regressed due to the suppression of industries such as financial technology and education by Chinese regulators. As a result, the MSCI Emerging Markets Index fell another 1.4% this year, even though most other markets are soaring.

However, some investors and analysts believe that the global economic recovery, strong demand for many natural resources, and excessive valuations elsewhere may help emerging markets regain their vitality.

“There are many opportunities now,” said Peter Oppenheimer, Goldman Sachs’ chief global equity strategist. “In view of the extent of the reduction in emerging markets, if concerns about the Delta variant are eased, and we do not get more significant anti-market intervention in China, I think there will be a reasonable rebound.”

According to data from the traffic data provider EPFR, despite the poor performance of emerging markets, emerging market equity funds have received US$81 billion in funding this year. If it continues, this will be the strongest year for investor inflows since 2010 and the second strongest year since at least 2000.

Eric Robertsen, head of global research and chief strategist at Standard Chartered Bank, estimates that due to concerns about the global economic recovery caused by the Delta variant of Covid-19, emerging market stocks are currently trading at a discount of about 40% to the U.S. stock market. %. China’s repression.

“We think this growth pessimism is a bit too much, and emerging market assets look attractive. The timing may be too early, but we are looking for that entry point,” he said in a report.

Some investors and analysts also bet that the emerging bond market will start to improve.Although emerging market bonds have exceeded The past two centuries Although developed countries have regular debt crises, they tend to outperform other fixed-income markets in the long run, but in the past ten years, their returns have been only around 60%, lagging behind US investment-grade bonds and junk The bond’s rate of return.

According to a widely watched exchange-traded fund, emerging market sovereign bonds denominated in domestic currencies have actually been losing money in the past decade due to slowing growth, low commodity prices and other adverse factors that have depressed exchange rates. Emerging market bonds—including local currency and U.S. dollar-denominated securities—will remain weak in 2022.

Nuveen, a US asset management company worth US$1 trillion, is currently one of the investment groups focusing on the recovery of emerging markets, especially Latin American government bonds and Asian stocks, which it believes should benefit from the expansion of the global economic recovery and rising inflationary pressures.

“As we enter a period of rising interest rates and increasing inflation, endowment funds and foundations will need to find risk exposures that are more likely to exceed inflation elsewhere, while also providing diversification of stocks,” Nuveen Multi-Asset Director Nathan · Shetty (Nathan Shetty), said in a recent report.

The line chart of total return (%) shows that emerging market stocks continue to fall in 2022

However, many analysts and fund managers are still skeptical of emerging markets because of the imminent risks in China. China accounts for more than one-third of MSCI and FTSE Russell’s influential flagship emerging market index, and China’s economic power is so great that its ebb and flow can affect sentiment in developing countries more broadly.

Beijing’s repression Since the beginning of July, the Hong Kong stock market has fallen by more than 10%, and the onshore CSI 300 Index has fallen by 6.4%. Oppenheimer said that in light of fears that more measures will be introduced, some global investors now believe that Chinese stocks are “uninvestable.”

JPMorgan Chase analysts pointed out that compared with many emerging markets, the supply of vaccines in developed countries has also helped the economy to reopen faster and more comprehensively. They believe that this will almost eliminate the long-standing growth gap between the poorer but faster-expanding emerging economies and the currently thriving rich countries.

Although optimistic that emerging markets will regain a foothold in the short term, Oppenheimer also pointed out some of the challenges they face in the long term, such as the slowdown of globalization and investors’ consideration of environmental, social and governance factors. Problems such as increasing pressure. That EM often scores poorly.

“Are we entering a golden age when emerging markets have significantly outperformed the market? I don’t think this is clear,” he said. “I think there is some structural resistance compared to the situation faced by emerging markets in the past 20 years.”

Twitter: @robinwigg

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