What’s Going On Here?Emerging market (EM) stocks have been looking pretty tasty this year, and it’s all down to three very special ingredients… What Does This Mean?Firstly, EM stocks are highly cyclical, ebbing and flowing in line with global economic growth – and since that growth is on the up, EM stocks are too. Secondly, the weakened US dollar – until recently – should make it cheaper for EMs to borrow money in the currency, as well as boost demand for some of their dollar-denominated exports. And thirdly, plenty of EM economies rely on selling raw materials, which should benefit from climbing commodity prices. Throw in the high valuations of US stocks at the moment, and it’s no wonder investors have turned to EMs in their droves. In fact, the amount of investment managers’ portfolios invested in EM stocks is at its highest ever level. Why Should I Care?For markets: India could be the best of the bunch.
Still, Morgan Stanley has warned that EM stocks might’ve already hit their peak for the year. So it reckons you need to be a bit more picky about precisely which EM investments you make. Enter India: the bank reckons the country’s strong economic growth outlook should boost Indian companies’ earnings and, in turn, their stocks.
The bigger picture: EMs aren’t immune to higher rates.
Investors’ main worry this year is that central banks will hike interest rates sooner than expected and damage the value of stocks. EMs would feel the effects too, but not necessarily all of them: Goldman Sachs reckons Asian stocks are still a good bet. History, after all, suggests they haven’t moved much lower even when investors have got antsier about rates. The bank’s particularly keen on Asia’s energy and insurance stocks, but recommends avoiding those in the internet and media industries. | 