Investors in emerging-market stocks have had a lousy few years. But are things now looking up for the global laggards as well? It seems they might well be. Emerging markets “appear to have bottomed”, reckon Robert Arnott and Christopher Brightman of Research Affiliates. The MSCI Emerging Market index has jumped by around 15% from its post-crisis low in January.
There have been several false dawns in the past few years, but the fundamentals now seem to be more encouraging than for some time. For one thing, the slump in commodities prices, which “shredded the budgets of producing countries”, has abated, say Neil Hume and David Sheppard in the FT.
Oil may now have bottomed as Saudi Arabia has agreed to a production freeze and the US shale industry is “finally showing signs of slowing”: US oil output posted its first significant year-on-year decline for almost eight years in December. So investors seem more willing to “look beyond” the glut. China’s latest stimulus measures, and the country’s evident determination to bolster growth, is also helping. Along with some short covering, this explains the 20% surge in iron-ore prices on Monday.
Emerging markets also suffer if the dollar rises, as the prospect of a higher yield on US assets dents demand for riskier ones. But with the Fed now unlikely to raise rates as fast as everyone expected at the start of the year, and the dollar already historically strong, there is less scope for emerging-market currencies to take another major knock. It’s interesting to note, says John Authers in the Financial Times, that an index tracking emerging-market currencies rebounded against the greenback as America suffered its recession scare – and has since held on to the gains, even as concern over a US downturn has eased.
Valuations also look appealing after a multi-year bear market. The MSCI index is on a price/earnings ratio of around 11, compared to 16 for the S&P 500; in 2007, at the apex of emerging-market mania, it eclipsed the S&P’s valuation. A price-to-book-value ratio of 1.3 also compares favourably to the S&P’s 2.4.
Brazil: enter the bull
Ironically, it might be the arrest of Brazil’s former president Lula (pictured) that will be remembered as marking the start of the recovery. Just as it’s always darkest before dawn, the start of a sustainable bull market is often accompanied by particularly grim news.
On that score, it’s hard to beat reports that Lula, who in the 2000s “came to personify Brazil’s seeming rise to prosperity”, as The Daily Telegraph’s Ambrose Evans-Pritchard puts it, was detained by police last week. They are investigating an ongoing corruption scandal that has also led to an attempt to impeach his successor, Dilma Rousseff.
Throw in the fact that the economic news can hardly get any worse, and this could be the signal that the emerging-markets tide has turned. Brazil’s stocks are already up by 30% from their January low. “When even stocks in bedevilled Brazil enter a bull market,” says the Financial Times, “something is definitely going on.