The bull run in US stocks is getting long in the tooth by any standard. While stocks are still very strong, valuations are high and fears over a correction or bear market abound. However, the bull market in emerging markets looks like it is just beginning. Bank of America thinks that emerging market stocks may double in the next two years as this current run looks similar to previous ones. EM stocks have risen 60% since early 2016, but many fear the tensions in North Korea could end the run. On the contrary, Bank of America thinks prices will keep moving higher and will only eventually be derailed by recession or overvaluation.
FINSUM:Emerging markets did not have nearly the gains that US stocks had over the last five years or so and now might be their time to break out.
Venezuela has been in a state of protest and disarray for the last couple of years. Chaos may be a more appropriate term. However, this article argues a much scarier new term is emerging: civil war. The country has suffered from inflation and a lack of basic goods, which have spawned increasingly intense protests from those demonstrating against Maduro’s government. Now things have worsened to the point where an all-out civil war may emerge. “We’re seeing much larger masses protesting across all major cities, including the working-class neighborhoods” where Maduro used to enjoy support, says a retired Venezuelan general formerly in charge of putting down such unrest. “The government is losing control”, he continued.
FINSUM: It is hard to discern what impact this may have on the US political and investment climate. It does seem the US would be more inclined/obligated to get involved given the closer proximity of the country. The oil market would probably gain on the prospect of decreased supply from Venezuela.
Source: Wall Street Journal
Most investors will be relatively happy with the way US markets have performed over the last few months. However, this piece points out that the really big gains of 2017 have been in emerging markets. As a whole, developed market equities have returned just half the 12.4% that emerging market equities have offered so far this year. The returns are great in bonds too as a basket of emerging market bonds has risen 7.4%, triple the global benchmark. Emerging stocks looks cheap right now as the MSCI Emerging Markets Index trades at 12.3x earnings compared to 16.6x in developed markets.
FINSUM: It looks like there are some very good opportunities out there in the emerging world, but beware of the currency risk and governance issues that one faces once they get into emerging market stocks.
Many investors may keep at least a watchful eye on the Chinese economy. While bears have been saying the country was going to see its economy fall apart for years, this article shines some light on the trouble the nation might have moving forward. Chinese wages, on average, are now higher than Brazil, Argentina, and Mexico, and are approaching pay levels in weaker European countries like Greece and Portugal. The wage gains mean that the country has largely started to converge with the West, while many other emerging markets have not.
FINSUM: Its success may be its downfall, as higher wages will not help sustain the huge manufacturing boom that powered the country’s growth. When you combine the logistical advantages of manufacturing in the Americas or Europe with potential wage savings, China’s competitive advantages seemingly disappear.
Source: Financial Times
We don’t cover much about the United Nations here, but the organization has just put out a stern warning that we think warrants the attention of investors. The UN says that emerging markets are going to spark a new financial crisis because of weakening trade, stumbling growth, and capital outflows which will all combine to create a spiral of deflation and debt. The UN says that capital flows into EMs have been driven by QE in developed nations, but that once that QE really ends and interest rates rise, “the third phase of the global financial crisis will come from emerging markets”.
FINSUM: This article comes at a time when few are discussing the potential for a big emerging markets blowup. It does makes sense that if the force (QE) that has been pushing capital into EMs is taken away, that this group of nations could see some big issues.
Source: Financial Times
There is a very familiar script about to playout in emerging markets. Over the past three decades, whenever the Fed hikes rates, money flows out EMs, weakening currencies, and calling into question whether local entities will be able to service their Dollar-based debts. This may be about to occur yet again as US rate hike expectations have been surging across markets. The piece says the key aspect for EMs will be how steep the US yield curve is, as if US rate expectations for 2017 are for a shallow tightening cycle, then long-term rates should stay low—favorable for EM assets.
FINSUM: This seems to simply come down to a yield play. If one could once again get 3-4% yields on US government bonds, there is certainly less incentive to be venturing into EMs.