Emerging Market stocks are up roughly 27% this year (through 08/23). By comparison, US stocks are up about 8%. However, over the last 5 years Emerging Market stocks are up only 4% while US stocks are up over 70% (source: Morningstar Direct). What has change?
- Clearer path to raising US Fed Funds Rate. This helps alleviate the capital flowing out of Emerging Markets as the rate path increase is now priced in, which contributes to #2.
The Wall Street Journal projection in December of last year for the Effective Fed Funds rate at the end of 2017 was 1.26 and 2.07 for 2018. As of August, those projections were 1.36 and 2.07, respectively. Very little deviation.
- USD has stopped appreciating. As Emerging Market Equities are priced back into dollars, currency appreciation adds to the return.
- Faster Growth: After years of stalling growth, projections are now higher and increasing more than developed markets.
- Valuation Tailwind: Because Emerging Markets have been beaten up over the last few years, they have a more attractive valuation than US Stocks moving forward; thus, higher projected returns. This is one of the primary reasons this outperformance may continue.
Source: Research Affiliates, Capital Advisors Ltd.
International investing involves special risks, including, but not limited to, currency fluctuations, economic instability, and political uncertainties, not typically present with domestic investments. Fluctuating foreign currency rates will impact your investment therefore increase or decrease in value where losses can exceed your initial deposit and may not be suitable for all investors.
Investors cannot invest directly in an index. Past performance is no guarantee of future results.
The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) and is a float-adjusted market capitalization index that is designed to measure equity market performance in emerging markets. It consists of indices in 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and Arab Emirates.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment.