Why Play Defense in Rising Emerging Markets? | ETF Trends

By Sammy Suzuki via Iris.xyz

Why should emerging-market investors exercise caution in a rising market? With big unresolved challenges, we think it’s prudent to target companies with solid fundamentals and stable business models to overcome macroeconomic uncertainty and build a resilient portfolio for the long-term.

Emerging-market stocks have bounced back in 2019. After dropping more than 14% in 2018, the MSCI Emerging Markets Index was up 12.2% through the end of April. And then after falling more than 4% in early May, many investors are trying to determine whether the upward trend will resume. However, instead of trying to predict the market’s next move, we think investors should look for the companies with the best chance of beating the 8.4% annual returns that the MSCI Emerging Markets has achieved on average over the past 20 years.

The Case for Not Timing the Market

Despite the strong performance of EM stocks this year, there are still plenty of reasons for caution.

Emerging-market stocks have risen and fallen based on two unpredictable factors of late. The first is the prospect for resolution of the US-China trade war, which like many geopolitical events is inherently difficult to predict.

Central bank action, which influences global interest rates, is the second and equally unpredictable factor. Our research shows that emerging-market equities tend to do well when interest rates are rising in emerging markets relative to those in developed markets. However, the path of relative interest rates doesn’t predict performance–the two merely coincide.

There’s also the fact that growth in emerging economies (and in many developed economies) is slowing, making further negative earnings revisions likely. And while emerging-market stocks are somewhat cheap relative to the 243-year average of 14.9 times our research shows that valuation alone is not a reliable predictor of how they will perform over the next year.

Click here to read the full article on Iris.