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Will the rally in Emerging Markets Continue?
Fri, 24 Mar Pre-Open

2016 has been a very good year for equities in Emerging Markets. The equity as an asset class snapped its negative streak and gave a return of around 11.2% in 2016. One of the key reasons has been the flow of the hot money from developed countries to Emerging nations.

What favors Emerging Markets over Developed counterparts?

First, Emerging Markets have started showing signs of growth after 2009 and Asia is set to remain biggest growth driver in the growth trajectory.

Second, valuations in the Emerging Markets are more attractive if compared to the developed markets after so many years of underperformance.

Third, Many Emerging Markets, especially outside Asia are coming out from recessions/downturns.

In fact, the falling interest rates in the developed markets and slowing of the economic growths also augurs well for the Emerging Markets.

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However, the policies and stance of US's new president Donald Trump has raised the question mark on the performance of Emerging Markets.

Apart from the trade frictions, the risk of rising interest rates, faster growth and higher inflation in the United States can be a party spoiler for the Emerging markets. Historically, higher US interest rates have proved to be challenging environment for the Emerging Markets.

That said, if we look at the current scenario there are some positives building up for the Emerging Markets:

  1. First, Emerging Markets has already faced significant outflows (in November 2016, after Trump was elected as the president, around $24 billion flew out of the Emerging Markets)
  2. Second, the gap between the US interest rates and Emerging markets is quite high.
  3. Third, US interest rates must rise at a faster pace to trigger largescale capital outflows because the current expectations are accounted for in the outflow so far.

The Bank of America Merrill Lynch (BofA ML) survey of fund managers has found that the net overweight stance of fund managers on emerging markets (Emerging Markets) has gone up from 5% in February 2017 to 18% in March.

This shows the market participants are still positive on the Emerging Markets over the developed markets.

We believe, the growth in the Emerging Markets and attractive valuations compared to their developed counterparts, makes strong case for them. The expected rate hikes in the US seems to be priced in.

Having said that, investors would be better off not speculating on upside in the broader markets. Rather looking for niche, under valued businesses that could tide over market corrections, if any, would hold good.

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Mar 16, 2018 (Close)