Whatâs Going On Here?Emerging market (EM) stocks have been looking pretty tasty this year, and itâs 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 â and since that growth is on the up, EM stocks are too. Secondly, the weakened US dollar â until recently â 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 itâs no wonder investors have turned to EMs in their droves. In fact, the amount of investment managersâ 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 mightâve 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 countryâs strong economic growth outlook should boost Indian companiesâ earnings and, in turn, their stocks.
The bigger picture: EMs arenât immune to higher rates. Investorsâ 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 havenât moved much lower even when investors have got antsier about rates. The bankâs particularly keen on Asiaâs energy and insurance stocks, but recommends avoiding those in the internet and media industries. |