Yahoo Finance Why Some Emerging Markets Appear Attractive
What Market Segments Should I Consider While the Fed Holds Out?
Emerging Market (or EM) Stocks
A more contrarian play could be revisiting EMs. Last week’s soft economic data out of China led to another selloff in China’s equity market. Domestic Chinese stocks were down between 3 percent and 6 percent , although H-Shares, traded in Hong Kong, managed to end the week higher.
However, other EMs fared better, according to the data. Markets posted solid gains in India, South Korea, Turkey and even Brazil. The turn in performance was also accompanied by a marginally positive week of flows into broad EM funds, according to market flow data.
Market Realist – Some emerging markets appear attractive.
The rout in Chinese stocks (MCHI) was a long time coming. Valuations were way ahead of fundamentals. However, the slowdown in China had a massive spillover effect. Since China is a huge market for commodities, signs of softer demand in China led to most commodities plummeting to multi-year lows. Then there was the massive global equity (ACWI) rout.
While commodity-driven economies like Brazil (EWZ) and Russia (RSX) could suffer due to lower commodity prices, which are likely to stay low for a while, not all emerging markets (VWO) are doomed.
The delay in the rate hike comes as a respite for emerging markets. If the Fed were to hike rates, risk-free assets like Treasuries (TLT) would see higher yields, inducing investors to sell their risky assets like emerging markets and purchase Treasuries.
Also, economies with a positive trade balance aren’t very reliant on foreign capital funding and may not be as impacted by capital outflows. As the graph above shows, many emerging economies have a much better current account status than a few years ago. India (INDA), for example, has a current account deficit of 1.4% compared to 4.7% in 2012. Malaysia, South Korea, the Philippines, Thailand, and China all have positive current account balances. This will position the emerging Asian economies well when the Fed does hike rates.
Finally, not all emerging markets are big exporters of commodities. India and China, for example, are big importers of commodities and benefit from the drop in commodity prices.
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