It’s been a brutal decade for emerging markets (EM) investors.
But that trend may begin to change in 2020. There’s a possibility the EM disaster (relative to the S&P 500’s rise) could be on hold in the next 6-12 months, but it’s very much dependent on the U.S.-China trade talks, specifically the prospects of the first phase.
Emerging markets in green (Source: Wikipedia)
Another catalyst supporting possible intermediate-term EM investment which was a big reason for recent bearish EM markets, the Federal Reserve’s quantitative tightening program, ended this year. Typically, EM firms borrow a lot of money in dollars. Lower rates help their overall economy by lightening debt loads, which benefits EM equity and debt markets.
Back in 2018, the worst-case forecasts called for Turkey, Argentina, and China completely imploding. That hasn’t happened…yet…which is another glimmer of EM investment hope.
That said, the biggest reason to be potentially bullish on EM investments in the intermediate term is the ongoing reversal of 2018 trade and Fed tightening pressures (Cornerstone completely exited EM positions in our model portfolios in Q2 2018).
Historically, such a reversal is good for risky assets. This can be seen in the extremely strong junk bond market and the U.S. stock market being historically high. The riskiest of assets are in the EM sector, both equities and bonds.
As such, this may be the beginning of a good period for EM investing, which is why we’re exploring adding EM positions back to our model portfolios in the intermediate term.
Still, the path is cautious. While China and Southeast Asia are the obvious beneficiaries of a trade deal, we must be mindful of potential debt and currency issues continuing in Argentina and Turkey.
Undoubtedly, EM investing isn’t for the faint of heart. It can be extremely volatile. But we wouldn’t be doing our job if we didn’t conduct due diligence to determine if a potential reentry into EM positions makes sense.
Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.