Will Emerging Market Stocks Continue to Outperform?

MSCI Emerging Markets Index last month outperforming the MSCI World Index for the first time since January.

Relatively attractive valuations, a weaker dollar and expectations that global supply chains will whir back into high gear are burnishing the appeal of developing-nation equities. The surge in global commodity prices is adding to optimism that improving growth will help boost cyclical shares in these markets.

MSCI EM index, which is trading at 14 times forward earnings, rallying about 20% over the next 12 months, according to data compiled by Bloomberg. That’s almost double the advance seen for the developed-nations’ gauge, which has a valuation multiple of about 20. 12-month forward earnings estimates for EM shares have jumped by about 40% from a June 2020 low.

Investors who missed out on the strong U.S. and EU consumer and cyclical equity bull run so far this year should consider investing in EM stocks. Rising inflation expectations and bond yields should drive continued investor rotation from growth to cyclical assets –- EM economies are more cyclical in nature.

David Chao, a global market strategist in Hong Kong at Invesco Ltd., which oversees about $1.4 trillion.

Not everyone is convinced emerging markets will outperform.

Risks include a vulnerability to escalating inflation, a potential pullback in commodity prices, said Mathieu Racheter, an emerging-market strategist at Julius Baer Group Ltd. in Zurich. Investors looking for EM exposure may want to consider sticking to value stocks in Asia, particularly in like China, India and South Korea, Racheter said.

Reference

Bloomberg, 2021-06-05, “Emerging-Market Stocks in Pole Position to Gain as World Reopens”