U.S. Markets open in 1 hr 16 mins

Tailwinds to Emerging Markets Resurgence?

By: Thornburg Investment Management
Harvest Exchange
April 17, 2017

Tailwinds to Emerging Markets Resurgence?

By Jack Rosovsky, CFA and Charles Roth


Emerging markets have shot out of the gate in early 2017, even as the Fed is hiking rates. Renewed global growth, earnings cycle and valuations bode well.

Busan, South Korea

In contrast to last year’s volatility in the first quarter, global equity markets showed strong returns during the first three months of 2017. Economic indicators and earnings around the world are beating expectations, moving global stock markets higher. International equity markets outperformed U.S. stock markets in the first leg of this year, with emerging markets almost doubling the U.S. large-cap stock performance. Perhaps valuations and earnings cycles are starting to be reflected in index returns.

If U.S. blue-chip earnings are at cycle peaks, developed market ex-U.S. and emerging market earnings are far from it. And valuation differentials—forward price/earnings ratios of 12.2x and 14.7x in the MSCI Emerging Markets and EAFE Indexes, respectively—are considerably less demanding than the S&P 500 Index’s 17.5x forward P/E. These two factors, along with accelerating global economic growth, go some way in explaining why the MSCI EM Index climbed 11.5% in the first quarter and the MSCI EAFE Index gained 7.3%, outpacing the S&P 500 Index’s 6.1% advance. The valuation differentials suggest that emerging market and advanced market stocks outside the U.S. may still have considerable upside.

Take emerging markets. Within the MSCI EM Index, all sectors showed positive returns, indicating that the advance is broad-based. From a country perspective, returns in Mexico, South Korea, and India were up mid- to high-teens in U.S. dollar terms, as the peso, won, and rupee appreciated meaningfully against the dollar. This is a reversal from the fourth quarter of last year, when these local markets had negative returns and their currencies depreciated against the dollar.

Interestingly, this performance came at a time when the U.S. Federal Reserve has raised its benchmark interest rate twice in four months, and somehow suggested dovishly that more hikes are on the way. Historically, U.S. rate hikes pull flows out of emerging markets in pursuit of higher dollar-based returns in U.S. assets. That may still play out. But faster emerging markets economic growth, earnings far from cycle peak and much cheaper valuations are proving to be a tailwind in the first leg of 2017.


Read more Global Perspectives from Thornburg >>

 Important Information
Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit our <html><body><em>literature center</em></body></html>. Read them carefully before investing.

The performance data quoted represents past performance; it does not guarantee future results.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

Investments carry risks, including possible loss of principal.

International investing involves special risks including currency fluctuations, illiquidity, volatility, and political and economic risks. These risks may be heightened in emerging markets.

Please see our glossary for a definition of terms.

Thornburg mutual funds are distributed by Thornburg Securities Corporation.

Thornburg Investment Management, Inc. mutual funds are sold through investment professionals including investment advisors, brokerage firms, bank trust departments, trust companies and certain other financial intermediaries. Thornburg Securities Corporation (TSC) does not act as broker of record for investors.

Originally Published at: Tailwinds to Emerging Markets Resurgence?