A golden age … emerging markets are likely to take the spotlight again

Renewed struggles in emerging markets due to recent volatility in Chinese equities have prompted some investors and analysts to discover an enticing opportunity to bet that a decade of pain may soon end.

Emerging equity markets, such as Brazil, India, Turkey or South Africa, much more than developed markets During most of the last decade, especially when compared to wild US stocks, according to the “business newspaper”.

US blue chip stocks have recorded a total return of 356 percent over the past 10 years, outpacing the 188% return of European stocks over the same period, according to data from Refinitiv.

However, emerging markets fared worse, with the MSCI Emerging Markets index gaining just 66%, leading some analysts to describe it as a “lost decade” for emerging markets.

After 2021 got off to a good start, with investors betting on a global economic recovery and rising commodity prices prime, emerging market stocks rebounded and fell again due to China’s regulatory crackdowns on sectors from fintech to education. Consequentially, questyear the MSCI Emerging Markets index fell 1.4%, even though most other markets are in rise.

However, some investors and analysts believe that a resilient global economic recovery, increased demand for many natural resources and extended valuations elsewhere can help emerging markets regain their vitality.

“There are pockets of opportunity now,” said Peter Oppenheimer, chief global Goldman Sachs equity strategist. “Given the downgrading of the emerging market valuation, if concerns about the delta shift moderate a bit and we no longer turn against it – Market intervention in China, I think there will be a reasonable recovery.

Despite the performance mixed emerging markets, equity funds in these markets received $ 81 billion questyear, according to the data provider in EPFR streaming. If this continues, it will be the strongest year for inflows since 2010 and the second since at least 2000.

Eric Robertson, head of global research and chief strategist at Standard Chartered Bank, estimated that emerging markets equities are now trading around 40% in less than US stocks due to concerns about the global economic recovery caused by the delta mutation and Chinese repression.

“We think this growth pessimism is exaggerated and the asset emerging markets look attractive. The timing may be premature, but we are looking for the entry point, “he said.

A golden age … emerging markets are likely to take the spotlight again

Emerging markets

Some investors and analysts are also betting that emerging bond markets will start to perform better. Although emerging market bonds over the past two centuries have tended to outperform other fixed income markets over the long term, despite the countries’ periodic debt crises. in via of development, have only reached about 60% of returns in the last decade, in lagging behind US bond yields Investment grade and junk bonds.

Emerging market sovereign bonds, denominated in the country’s currency, have actually lost money over the past decade, according to a negotiated fund in stock market widely followed, since the slow growth, commodity prices prime inert and other headwinds lower exchange rates. Emerging market bonds, either in local currency that in dollars, remained weak in 2021.

Newfin, the $ 1 trillion asset manager, is among the investment groups now looking to recovery in emerging markets. in in particular Latin American government bond markets and Asian equity markets, which he believes should benefit from the recovery of a global economy in expansion and rising inflationary pressures.

“As we enter in a period of high interest rates and rising inflation, endowments and institutions will need to look elsewhere for exposures that are most likely to outweigh inflation while providing diversification in isolation from actions, ”Nathan Shetty, Novin’s head of multiple businesses, wrote in a recent report. “.

But many analysts and fund managers remain skeptical of emerging markets, with Chinese risks looming at the moment. China accounts for more than a third of the major emerging market indices affecting MSCI and FTSE Russell, and even the country’s economic weight is so great that its volatility can affect sentiment towards the developed world. in wider way.

The Beijing crackdown caused Hong Kong’s stock market to plummet by more than 10% since the beginning of July and the CSI 300 index of local equities fell 6.4%.

Oppenheimer said some global investors now view Chinese equities as “non-investable,” given fears of further equities.

JPMorgan analysts point out that vaccine availability in the developed world has also helped economies reopen faster, compared to much in emerging markets. They believe this will nearly close the long-term growth gap between poorer emerging economies, but in faster growth, and the rich world now thrives.

While he is optimistic that emerging markets will regain their position in the short term, Oppenheimer also points to some of the challenges they face in the long term, such as slowing globalization and increasing pressure on investors to take environmental, social and environmental factors into account. governance, in as much as problems for which emerging markets have performed poorly.

“We are entering in a golden age in which emerging markets have largely outperformed? I think it’s less clear, “Oppenheimer said.” I think there are some structural hurdles compared to what emerging markets have faced over the past 20 years.

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