Emerging markets are notorious for being a roller coaster ride of ups and downs. So far this year, the signs are pointing to an upswing.
They could very well beat the U.S. this year. Falling oil prices and the strong U.S. dollar were problems for emerging markets in the past. They’re overall positives now, experts say.
Despite a recent surge, emerging markets still offer a good bang for your buck. The S&P 500 has a value of 17. Compare that to the MSCI Emerging Markets Index, which is valued at 13. A popular fund, the iShares MSCI Emerging Markets ETF, is up 6% in the past month alone.
“They are relatively inexpensive in a world where there are few bargains,” says Jeff Kleintop, chief global strategist at Charles Schwab.
Many people buy into the idea that countries like China and Brazil will grow their middle class substantially in the coming years, but the reason to purchase emerging market stocks right now is all about oil.
Oil opportunity: Plunging oil and other commodity prices do hurt some countries like Russia, but the majority of emerging market nations now import more oil than they export. That means low oil prices are good for many emerging countries and their businesses.
The tide has turned for the heavyweights, like China, India, South Korea and Taiwan. Stocks in those countries make up about half the value of the emerging market index and the companies are much more consumer-focused now than in the past, experts say.
“For many [emerging] countries, especially the Asian economies, the energy decline is a tailwind, it’s a positive,” says Audrey Kaplan, senior portfolio manager at Federated Investors Inc.
No more dollar dilemma: It’s also time to bust the myth that a strong U.S. dollar hurts emerging markets.
When the dollar gets stronger, other foreign currencies lose value. A weaker currency sounds bad, but it actually helps increase the value of emerging markets in two ways: trade and debt.
Emerging countries can produce goods even more cheaply and sell them to America for a higher profit. Take Turkey, for example. Its currency, the Lira, has lost a lot of value in recent years compared to the dollar and euro. That helps Turkish goods look cheap in Western Europe.
“It’s a growth story. Earnings and sales revisions are increasing because its currency depreciated so significantly,” Kaplan says. Turkey is, “an export economy. It exports to the rest of Europe, everything from toasters to auto supplies.”
Turkey is doing so well that it has four of the top 10 fastest growing cities in the world, according to the Brookings Institution.
Currency instability used to plague emerging market debt. Back in the 1990s, the U.S. dollar was getting stronger. That caused a crisis in emerging markets because many countries had their debt denominated in U.S. dollars. A stronger dollar made their debt more expensive.
Countries got smarter. Now the majority of emerging nations’ debt is in local currency, according to the International Monetary Fund. The local bonds protect them from times like today when the U.S. dollar is going up.
Central banks across emerging markets have positioned their economies to better withstand future volatility in commodities and currency, experts say.
“They no longer feel the pinch when the dollar goes up,” Kleintop says. “They’ve become much more like they’re developed country peers.”
2015 rush: There could be a major uptick in money for emerging market stocks this year, according to eVestment, a data analytics company in Atlanta that tracks stock movements. They estimate that investment into those stocks this year will be $50 billion — more than four times higher than last year.
Owning individual stocks traded on exchanges in China, India and other nations is getting easier. China launched a pilot in 2014 to allow more foreign investors to purchase shares on the Shanghai Stock Exchange, but the majority of investors gain exposure to emerging markets through a mutual fund or an ETF that tracks an index such as the MSCI Emerging Markets.
“People have to look towards emerging markets for higher growth and higher returns,” over the long term, says Nick Smithie, chief investment strategist at Emerging Global Advisors in New York.
