Since its peak in early 2021, the MSCI Emerging Markets Index has lost over 20 percent. While in 2021 it was the global turnaround in interest rates and declining commodity prices that threw a wrench in the gears of the EM markets, from February 2022 Russia’s invasion of Ukraine caused uncertainty.
Persistent problems in the supply chains and repeated corona lockdowns in China represented another serious stress factor for the markets. The further increase in inflation rates in the industrialized countries also had a negative impact. Only individual markets such as India or Indonesia showed a positive exchange rate development in the respective currency.
Many emerging market stocks are trading at the low end of their historical valuation ranges following recent market declines. In the past, this was often the time when risks were sufficiently priced in and a trend reversal was announced. In addition, there are first economic and political signs that the situation is improving and that purely fundamental arguments are gaining ground.
The emerging markets have above-average population and economic growth compared to the industrialized countries, which could now stabilize again and thus be reflected more clearly in rising corporate earnings. This should then also lead to increasing optimism on the markets, increasing demand and ultimately to rising prices.
The reasons for the emerging optimism are as follows: The global interest rate level is at a level at which no further significant increases can be expected. Rather, the first cautious easing measures by the central banks are expected in 2024. The US dollar seems to have maxed out its bullish trend as well. In the event of a weakening, both factors would relieve the countries heavily indebted in US dollars. China has recognized its difficult economic situation and is stimulating its economy by easing interest rates. A trend that should continue over the course of the year. This development will have a positive impact on the entire Asia region. The raw material markets will show a more positive development in the future, which will improve the income situation of many EM countries. Ultimately, the sentiment indicators for stock markets in EM are very negative, in many cases a good anti-cyclical buying time.
Nevertheless, investors should be aware of the risks that still exist. In particular, a deterioration in trade relations between the USA and China, totalitarian action by China towards Taiwan and an escalation of the Ukraine war should be mentioned here. For this reason, investments should be staggered. ETFs appear to be the appropriate product choice due to risk diversification and costs. Investors can choose from a variety of products, for example the IShares MSCI EM (WKN A0HGWC). Similar products are also offered by Amundi, Xtrackers and other providers. Investors who want to exclude China also have a range of products to choose from. The Lyxor EM ex China (WKN LYX99G) is an example.
In summary, it can be said that the emerging markets currently offer significantly greater opportunities than risks. Investors should focus their considerations more on these again.
by Uwe Wiesner, asset manager at Hansen & Heinrich Aktiengesellschaft in Berlin
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