• Wealth Management

Don’t Give Up on Emerging Markets

Even though investing in developing countries hasn’t paid off this year, there may well be upside ahead.

So far, 2018 has been a challenging year for emerging markets. In 2017, emerging market stocks gained more than 30%, but they are now 10% below where they peaked in late January. In contrast, developed markets have recovered most of their losses from February and March’s selloff.

However, just because emerging markets have failed to rebound, doesn’t mean they won’t. Below are six reasons I think investors should stay in emerging markets:

  • Global growth remains robust. Rates of growth have slowed from their best levels in the first quarter, but the current pace of activity is still pointing to near double-digit annual gains in corporate profits.
  • The dollar is unlikely to keep rising. I believe that the U.S. dollar has reached a top for this cycle and could enter a multi-year bear market due to growing U.S. deficits and inflationary pressures.
  • Commodities prices are going up. Emerging market returns usually correlate with commodity prices. That hasn’t happened this year, mainly because of surprising dollar strength, but I expect commodities and emerging markets to start trading more in sync as the dollar weakens.
  • Capital spending is strong. S&P 500 companies are continuing to spend on capital projects. That tends to benefit emerging markets, which often supply parts and raw materials for those projects.
  • China-U.S. trade conflicts could be a benefit. Long-term, no country wins from trade wars, but in the short-to-intermediate term, emerging markets could get a boost from any potential escalation in trade conflicts between the U.S. and China.

Of course, some headwinds to emerging market growth remain and there are country-specific risks in places like Argentina and Turkey. Investors will likely continue to wring their hands over the recent resurgence of the U.S. dollar, potential peaking of global economic momentum, slowing in China and the implications of escalating trade wars. In addition, the recent memory of an emerging market rout following the 2014-2015 episode of rapid US dollar appreciation and crashing oil prices may continue to cause concern.

Bottom Line: I don’t suggest investors overemphasize emerging markets. But don’t avoid these regions either. You could miss out on a potential rebound.

Ready to invest in what matters to you?

MORGAN STANLEY ACCESS INVESTING