Investors Swing To Emerging Markets

5/2/2016


Few asset classes have treated investors worse than emerging markets in the past five years. But pendulums don't reside at extremes forever, and shares from developing countries are driving higher in 2016.

The MSCI Emerging Markets Index, down 13% for the year at its Jan. 21 low, is now up 6%. Latin American countries lead the rebound, with Peru up 40% in 2016, followed by Brazil (up 35%) and Colombia (up 28%). Nine of the top 10 stock markets for 2016 hail from emerging markets, the exception being Canada (up 16%).

NEW LEADERS EMERGE
This year's strongest equity returns are coming from emerging markets, based on a group of 46 countries tracked by MSCI.
---- Year-To-Date ----
5-Year Annualized
Country
Return
(%)
Rank
Return
(%)
Rank
Peru (e)
40
1
(4)
24
Brazil (e)
35
2
(18)
45
Colombia (e)
28
3
(13)
39
Turkey (e)
24
4
(7)
34
Russia (e)
22
5
(15)
42
U.S. (d)
2
28
9
3
Ireland (d)
(6)
42
9
4
Greece (e)
(6)
43
(36)
46
Israel (d)
(8)
44
(2)
18
Finland (d)
(8)
45
(3)
21
Italy (d)
(10)
46
(9)
35
(e) Emerging. (d) Developed.    
Source: MSCI.     Returns as of April 26.

Investors have taken notice. Portfolio flows into emerging markets reached a 21-month high in March, according to the Institute of International Finance.

In the face of sputtering global growth, the recent rally in developing countries is somewhat surprising. But commodity prices have recovered from a rocky start to the year, and the U.S. dollar has begun to weaken.

A lack of urgency by the U.S. Federal Reserve to raise interest rates has also forced some investors to look elsewhere for yield. In April, Argentina issued $16.5 billion in bonds, more than double the previous record for government-issued debt in an emerging market. The debt offering signals that investors have rediscovered their appetite for risk, overlooking Argentina's default in 2001.

Some of the underlying trends currently helping emerging markets, such as commodity prices and currency rates, could quickly reverse. But after years of big losses, emerging markets may now offer valuations that discount these risks. The pendulum has begun to swing back in their favor.

We don't recommend any emerging-market mutual funds, but the following two earn high scores in our mutual-fund rating system: Vanguard FTSE Emerging Markets ETF ($35; VWO) and Vanguard Emerging Markets Stock Index ($22; VEIEX).


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