A sharp fall in China’s stock market caused emerging-market stocks to wipe out all their gains for the year.
The MSCI emerging Markets index fell 2.4 percent on Monday and is now down for 2021. Strategists are divided on the outlook. State Street Global Markets recommends allocating only about 20 per cent to developing countries. Others, such as AllianceBernstein, think strong risk appetite will return.
“It is too early to shift back into emerging market equities, especially as the Fed’s recent policy shift provides some short-term support for the dollar,” said John Bilton, global head of multi-asset strategy at Morgan Asset Management.
Emerging market stocks have been hit this year by the pandemic backlash, erasing 12 per cent of their gains since February. The asset class is now significantly underperforming other stocks. The MSCI developed Markets index is still up 15 per cent this year.
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“We prefer developed Markets to emerging Markets,” Daniel Gerard, senior multi-asset strategist at State Street Global Markets in Singapore, said in a written response, citing low COVID-19 vaccination rates in many developing countries.
Among developing markets, he is more bullish on areas that are more likely to benefit from the global recovery from COVID-19, particularly commodity-driven Brazil and the technology markets of South Korea and Taiwan.
Stocks in Malaysia and the Philippines have been among the world’s worst performers this year, southeast Asia is still dealing with a pandemic backlash, and in China, an index of Internet stocks has lost more than a third of its value since peaking in February amid a government crackdown on the tech sector.
Another challenge comes from China. China’s economic growth, once a bellwether for the global recovery from the pandemic, has slowed as demand for exports has weakened. The prospect that the Federal Reserve will act to reduce its stimulus is another headwind weighing on currencies in developing countries.
Against this backdrop, emerging market equities continue to fall. The developed markets index trades at a forward PE ratio of 13 times, more than two standard variances below the five-year average for developed markets.
Gerard said State Street is cautious about Southeast Asia and Mexico, where the outbreak is putting pressure on earnings growth.
Still, there are those who think emerging markets will eventually outperform.
“Not only will many emerging markets be seen as cyclical recovery options that have not yet been fully priced in, but large-cap technology stocks, which are heavily indexed in emerging markets, may come back into focus,” Morgan Harting, a fund manager at Alliance Bernstein in New York, said in a written response. “As some regulatory concerns are clarified, I expect some industry strategists to refocus on Chinese companies.”