Since 2010, emerging markets equities have underperformed due to a stronger dollar and declining commodity prices. But that trend could be reversing.
Fundamentally, growth around the world is on the upswing. The G10 Economic Surprise Index, the Morgan Stanley Global Trade Leading Indicator, and the JPMorgan Global Composite Purchasing Managers’ Index have all suggested higher growth since February 2016. Commodity demand is likely to pick up as global growth increases, keeping commodity prices stable. In China for example, manufacturing has already accelerated, exporting inflation to the rest of the world. Emerging Markets are poised to be the primary beneficiary of this global rebound, with MS & Co. forecasting GDP growth in emerging markets at double the rate of the United States.
FactSet consensus estimates are for 20% earnings growth in emerging markets for 2017 compared to 10% in the United States and 17% in developed international countries. But what makes Emerging Markets particularly attractive compared to the rest of the world are valuations. Based on market expectations for earnings, emerging markets are trading at a 24% price-earnings discount from developed markets, according to Bloomberg).
Many of the risks that once held back EM equities now appear contained. In 2013, the Fed signaled that it was looking to taper Quantitative Easing. The rising US interest rates strengthened the U.S. dollar and squeezed emerging market debtors, many of whom needed US dollars to pay back debt. Emerging markets fell into a recession that was made worse by plummeting commodity prices, capital outflows, and falling currencies.
Today, emerging market economies appear much more resilient. Their real interest rates have risen while US rates have remained relatively stable, allowing real rate differentials to widen. The yield advantage is attracting capital, helping to support local currencies. This, in turn, would increase returns for US dollar investors and make it easier for emerging market companies to pay back dollar-denominated debt.
On the political front, with uncertainty around trade policy, we prefer an active approach to emerging market equities, focusing on domestically oriented companies in countries such as Indonesia, India, Taiwan, Korea, and China. Overall, synchronous global growth, a stable dollar, and reviving commodity demand could support a multi-year bull market in emerging market equities. Because they are currently cheap relative to other equities, the Global Investment Committee believes now is a good time to consider adding exposure to Emerging Markets.
Past performance is not a guarantee of future results.
Equity securities may fluctuate in response to news on companies, industries, market conditions and general
Investing in foreign markets entails greater
risks than those normally associated with domestic markets, such as political,
currency, economic and market risks.
These risks may be magnified in emerging markets and frontier markets.
Investing in commodities entails significant risks. Commodity prices may be affected by a variety of
factors at any time, including but not limited to, (i) changes in supply and
demand relationships, (ii) governmental programs and policies, (iii) national
and international political and economic events, war and terrorist events, (iv)
changes in interest and exchange rates, (v) trading activities in commodities
and related contracts, (vi) pestilence, technological change and weather, and
(vii) the price volatility of a commodity. In addition, the commodities markets
are subject to temporary distortions or other disruptions due to various
factors, including lack of liquidity, participation of speculators and
Investing in currency involves additional special risks such as credit, interest rate fluctuations,
derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic
uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets
The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment.
The indices selected by Morgan Stanley Wealth Management to measure performance are representative
of broad asset classes. Morgan Stanley Wealth Management retains the right to change representative indices at any time.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Morgan Stanley Wealth Management is the
trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in
the United States. This material has been prepared for informational purposes
only and is not an offer to buy or sell or a solicitation of any offer to buy
or sell any security or other financial instrument or to participate in any
trading strategy. Past performance is not necessarily a guide to future
The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Morgan Stanley Wealth Management recommends that investors independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor.
This material is based on public information as of the specified date, and may be stale thereafter. We have no
obligation to tell you when information herein may change. We and our third-party data providers make no representation or warranty with respect to the accuracy or completeness of this material. Past performance is no guarantee of future results.
This material should not be viewed as advice or recommendations with respect to asset allocation or any particular
investment. This information is not intended to, and should not, form a primary
basis for any investment decisions that you may make. Morgan Stanley Wealth
Management is not acting as a fiduciary under either the Employee Retirement
Income Security Act of 1974, as amended or under section 4975 of the Internal
Revenue Code of 1986 as amended in providing this material.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan
Stanley”), its affiliates and Morgan Stanley Financial Advisors and private
Wealth Advisors do not provide tax or legal advice and are not “fiduciaries”
(under ERISA, the Internal Revenue Code or otherwise) with respect to the
services or activities described herein except as otherwise provided in writing
by Morgan Stanley. Individuals are encouraged to consult their tax and legal
advisors (a) before establishing a retirement plan or account, and (b)
regarding any potential tax, ERISA and related consequences of any investments
made under such plan or account.
This material is disseminated in the
United States of America by Morgan Stanley Smith Barney LLC.
Morgan Stanley Wealth Management is not
acting as a municipal advisor to any municipal entity or obligated person
within the meaning of Section 15B of the Securities Exchange Act (the
“Municipal Advisor Rule”) and the opinions or views contained herein are not
intended to be, and do not constitute, advice within the meaning of the
Municipal Advisor Rule.
Third-party data providers make no
warranties or representations of any kind relating to the accuracy,
completeness, or timeliness of the data they provide and shall not have
liability for any damages of any kind relating to such data.
This material, or any portion thereof,
may not be reprinted, sold or redistributed without the written consent of
Morgan Stanley Smith Barney LLC.
© 2017 Morgan Stanley Smith Barney LLC. Member SIPC. CRC#1759881 04/2017