Even while the S&P 500 has recovered recently, the gauge was flat for the year, and its emerging market equivalent was up 10%.
After years of missing out on the surges in US stock, the faithful Wall Street emerging markets are finally reaping the benefits.
Bank of America, Franklin Templeton, Morgan Stanley Investment Management, and AQR Capital Management are betting that the tide will favor developing market stocks.
Michael Hartnett of Bank of America refers to this period as the “next bull market.” AQR predicts that over the next five to ten years, they will deliver local currency returns of over 6% annually, surpassing a 4% increase for US shares in dollars.
Even while the S&P 500 has recovered recently, the gauge was flat for the year, and its emerging market equivalent was up 10%.
The gain is giving hope that a decade and a half of unfulfilled promise, during which the US benchmark increased more than 400% and developing nation shares advanced a mere 7%, may be coming to an end.
Investors are turning away from the US as the trade war intensifies, the dollar falters, and the S&P is volatile.
Moody’s Rating had to cut the US credit rating since worries about debt and deficit were more pressing than challenges to continued US market outperformance.
Investors who wanted to run from the US market turned to the euro, German bunds, and Japanese yen. Others who were prepared to take a little risk are reconsidering the habit of pulling money out of emerging markets and pushing it into the US during the crisis.
Christy Tan, an investment strategist at Franklin Templeton who advocates developing nation debt as an alternative to US Treasuries, stated that investors should take note of the risk of the US dollar depreciating.
The local currency gained when converted back into the US dollar due to the dollar’s four-month decline through April.
Jitania Kandhari, deputy chief investment officer at Morgan Stanley Investment Management, switched from US to EM stocks. Her fund has gained 17%, after failing to match the US stock market for the last two years.
Kandhari is now searching for shares in the military, finance, electrification, and health with local demand, so they are less vulnerable to increasing tariffs. AQR’s managing director, Chris Doheny, focuses on smaller emerging markets with robust medium-long-term performance.
Some investors get turned off by transaction costs and the erratic earnings growth in some emerging countries compared to the US and other developed markets.
Michael Bailey, director of research at Fulton Breakefield Broenniman, states that the real issue is recurrent earnings growth, even though the emerging market gross domestic product (GDP) is expanding more quickly than the developed market GDP.
He cited China as a long-term example, where the economy was expanding, but Chinese companies issues many shares that it affects the earnings, compared to the United States and non-US developed countries. India is another attractive emerging market, but accessing it is challenging due to high transaction costs.
Gabriela Santos, chief market strategist for the Americas at JPMorgan Asset Management, says there is a growing appetite for European assets, but the shift from the US to emerging markets is not showing up in broader capital flow data.
However, she noted that the second step might favour emerging countries if the currency keeps declining.
The United States, with its outstanding debt of 30 trillion dollars, looks like it cannot support its economy compared to other emerging markets. While the Federal Reserve is cautious about relaxing too strongly in case it triggers inflation, countries like India and the Philippines have already acted quickly with significant rate cuts.
Tan of Franklin Templeton stated that the fundamentals of developing economies are strong, as seen by lower foreign debt and favourable debt-to-GDP ratio, citing Saudi Arabia, South Korea, and several Asian countries. A low debt profile is particularly attractive in contrast to the United States.