Emerging markets stocks managed to register 8.6% gain in the first-half this year, outperforming developed markets by 5.5%, the best first-half performance since 2009.
Was that a dead cat’s bounce, or can we expect emerging markets to uncharacteristically beat developed countries in 2016?
Investment banks from Citigroup to Credit Suisse think emerging stocks can do better in the second half.
There is a belief among investors that to sustain a bull market, you need a lot of earnings growth, which we are not likely to see from emerging markets. However, that is a misconception, noted Citi Research’s colorful strategist Markus Rosgen. The key is, as long as “investors believe tomorrow will be better than today,” we have a bull market. Rosgen thinksMSCI Asia ex-Japan stocks have another 15-20% upside in the next year:
What has hurt Asia over the last five years has been the strengthening USD and the deflationary impact thereof. Even post-Brexit, the DXY is weaker than it was back in January. This should be positive for asset turn and liquidity creation within Asia, and should help set the region up for earnings surprises. A weaker USD should also help reflate the asset side of central banks’ balance sheets, which are already showing smaller year-on-year declines.
At least half of the emerging markets outperformance in the first-half came from currency gains.
Credit Suisse’s Alexander Redman gave 9 reasons to support his decision to go Overweight on emerging markets:
(i) our four factor regression model suggests 17% dollar upside to year-end 2016, (ii) steadily improving absolute and relative margins and return on equity, (iii) EM currencies remain extraordinarily cheap on PPPagainst history, (iv) evidence of stabilisation in Chinese GDP, real estate and earnings, (v) improvement in emerging market relative macro momentum, (vi) rising forecast earnings growth with stabilizing revisions, (vii) capex adjustments and rising free cash flow is boosting payout ratios, (viii) absolute and DM relative valuations offer an attractive entry point, and (ix) global funds remain deeply under exposed to emerging equities.
Year-to-date, the iShares MSCI Emerging Markets ETF (EEM) gained 8.6%, the Vanguard FTSE Emerging Markets ETF (VWO) rose 9.4%, the iShares MSCI Asia ex-Japan ETF(AAXJ) was up 3.8%. By comparison, the SPDR S&P 500 ETF Trust (SPY) advanced 4%.
By: Shuli Ren (Barrons, Asia).
Photo: Think Advisor.
Review: Emerging Market Formulations &
Research Unit, FLAGSHIP RECORDS.
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