Yahoo Finanzen Why the Outlook for Emerging Markets Is Improving
After suffering one of their worst performances in years during 2015, emerging markets are rebounding in 2016.
Using the MSCI Emerging Markets index as a benchmark, emerging markets gained nearly 9 percent in the last three months, rising high enough to wipe out a shaky start to the year. Year-to-date, the index is up about 1.58 percent -- a huge improvement after last year's 21.6 percent drop.
Revived commodity markets, particularly stronger crude oil values, are helping emerging markets overall heal, market watchers say. Higher commodity prices are an important factor for emerging countries as many of them produce and export natural resources. Much of 2015's weakness in emerging markets came on the back of disintegrating commodity prices.
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Emerging markets' fortunes are still somewhat tied to commodities, and given the idea that commodities markets may have bottomed, analysts say it's a good bet that the bulk of emerging markets' weakness is behind them.
There is a difference, however, between a market bottom and one that's on an uptrend, and emerging markets have some way to go before the all-clear signal is given. Still, there are some opportunities in the space for risk-tolerant investors.
The worst-case scenario is over. Joel Wells, portfolio manager of Alpine Funds' Emerging Markets Real Estate Fund (AEMEX) says this year's weak start came from investor fears about Chinese growth, a strong dollar and commodity price swings. The reversal of those trends led to the rebound in emerging markets, he says.
The low level in the emerging market index during January was a "worst-case scenario," he says.
"I think a trough in the markets has been established because I do think those three issues have been addressed to a greater or lesser degrees. Fears over China were overplayed in the first couple of weeks of the year. I think the big selloff in the commodity complex was a bit of an overreaction. That's not to say we're in a blue-sky scenario with commodities or China, but the worst-case scenario that was looked at, at the time, was an overreaction," Wells says.
Arnab Das, head of EM Macro for Invesco in London, says another factor driving the reversal of fortune in emerging markets is a less-aggressive Federal Reserve, which has held back on raising interest rates so far this year. That helped to tame the U.S. dollar strength.
"Effectively the Fed weakening the dollar, which has helped to support commodity prices since commodities are usually priced in dollars," Das says.
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Rising commodity prices also helped to bring about a slightly more reflationary environment, erasing the fears of deflation that plagued the markets in 2015.
Even with the rebound, many emerging market valuations remain lower than where they were at the same time last year, says William Hoyt, managing director at Lattice Strategies, a San Francisco firm that operates the Lattice Emerging Markets Strategy exchange-traded fund (ROAM) that focuses on emerging markets.
How to invest in emerging markets. Investors need to keep a few factors in mind before stepping back into emerging markets. The question now, Wells says, is are the gains in emerging markets durable? He is skeptical since the rally was driven by global macroeconomic factors. But as expectations for a possible interest rate hike remain, the strength may fade, he says.
Emerging markets may be seeing some of that happening already, given the slip in commodity prices.
"Once we get into summertime, once the Fed gives more clarity and visibility on the rate path in the second half of the year, the macro-enthusiasm for emerging market shares is going to fade," Wells says.
Das says investors need to understand that structural problems in emerging markets remain, like the continued excessive debt from the global financial crisis. In addition, with the outlook for the global economic growth slowing as a whole, investors shouldn't expect the same outsized returns they received in the beginning of the 2000s.
Hoyt says investors looking at emerging markets need think beyond valuation. Political and economic risks are just as important. Often, these risks are expressed in a country's currency markets, he says.
Thailand is seeing its currency firming because its central bank is building currency reserves again, and Hoyt says that's a healthy sign. Other Asian countries with solid valuations and stable economies and political systems are Taiwan and South Korea, which can tap into the U.S. economy, he says.
"We want to make sure that the investments have the highest possible quality. Geopolitically, and from a macroeconomic view, there's more opportunity in Asia than Latin America," he says.
Mexico may also do well because of its stronger economic ties to the U.S., Hoyt says.
One of the darlings of the emerging-market world was Brazil, but that country has fallen on harder times. China was its biggest client but has reduced imports, hurting Brazil's economy. Plus its president, Dilma Rousseff, is immersed in impeachment hearings as she is accused of illegally manipulating finances to hide the growth in the public debt ahead of her 2014 reelection. She denies the charges.
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"(Brazil) needs to change its export-driven economy and its reliance on China," Das says. "Brazil needs a lot of reform. It needs a lot of fiscal adjustment."
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