Sentiment toward emerging markets assets, equities in particular, isn’t great at the moment, but some market observers believe that the outlook for stocks in developing economies is bound to improve at some point this year.
Should that prognostication prove accurate, it would benefit an array of exchange traded funds, including the Emerging Markets Internet Ecommerce ETF (EMQQ). The market observers brave enough to be bullish on emerging markets assets today cite a familiar factor: valuation. That’s relevant to investors considering EMQQ because the fund is chock-full of growth stocks.
Additionally, it appears that the spate of rate hikes undertaken by emerging markets central banks last year in a bid to damp inflation did the trick, and with the worst of inflation likely priced into stocks in developing economies, the asset class could be poised to rise.
“However, these problems are not new. Markets have now priced in a rising inflation backdrop with interest rate increases from leading central banks,” according to BNP Paribas research. “The sell-off in 2021 drove down EM equity valuations as well as some currencies and depressed local debt markets. Even hard currency assets were not spared. Arguably, EM assets are now priced attractively.”
Another potential for EMQQ is that following last year’s regulatory exploits by the Chinese Communist Party (CCP) and the aforementioned inflation, many asset allocators trimmed exposure to emerging markets stocks and are now under-allocated to the asset class. Should these stocks turn around, money managers could get back in the game.
“In addition, there is cash waiting on the sidelines. Investors have been reducing their EM exposure materially for quite some time, resulting in sharply higher cash holdings by many institutional investors,” adds BNP Paribas.
Obviously, returns will tell the story, but at the moment, consensus is building that the darkest clouds facing emerging markets stocks are passing.
“We believe this set-up forms a favourable backdrop for EM markets to recover if macroeconomic pressures were to ease. Given the sharp correction in these markets, investors are likely to see more positive surprises than negative news,” notes BNP Paribas.
The French bank adds that investors should be selective in emerging markets while displaying a preference for those names with strong cash flows and less sensitivity to rising real yields. Some EMQQ member firms check those boxes.
For more news, information, and strategy, visit our Emerging Markets Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.