Emerging markets were the greatest investment opportunity of the last decade, and arguably the most disappointing of the current one. The MSCI emerging markets index has now fallen in four out of the last five years, and dropped a thumping 14.92% in 2015.
Foolish fun
This is likely to excite the attentions of Foolish investors who like to dive into burnt-out sectors before they fire back into life and the bargains have all gone. It has certainly excited my attention, as has the 15% rise in the FT Trustnet global emerging market sector in the last three months. Fund managers are also jumping up and down, no doubt hoping the spotlight will start shining on this out-of-favour sector again. BlackRock reckons emerging markets are in a “sweet spot”. Should you sink your teeth in?
Emerging market ETFs have attracted nearly $16bn this year to recoup 75% of their 2015 outflows, while short traders have been heading for the exits. Richard Turnill, global chief investment strategist at BlackRock, pins this on the weakening US dollar, a rebound in commodity prices and recovering Chinese economy. But he isn’t getting too excited, warning that emerging market valuations are no longer unambiguously cheap. Recent trends could reverse, Turnill adds, and a sustainable rebound would require evidence of structural reforms addressing excess debt, industrial overcapacity and low corporate profitability, particularly in China.
This is the year that is
Other fund managers share his enthusiasm: Robin Geffen and James Dowey say that 2016 will be “remembered as the year you should have been buying emerging markets“. They warn that recent emerging market equities have seen several false dawns lately, with the sector surging at the start of 2015, only to be destroyed by the summer China crash. Today they favour China and Russia, and are steering clear of beleaguered Brazil.
Many of today’s optimists appear to be pinning their hopes on the latest bout of Chinese stimulus, brushing over structural problems such as massive debt, huge surplus capacity, a housing bubble and very shadowy banking system. None of these problems have been solved and it may take another crash to do it.
Emerging London stocks
That said, a Chinese and emerging markets recovery would be welcome news for oil and commodity stocks. It would also boost struggling FTSE 100 companies such as spirits giant Diageo, fashionista Burberry Group, emerging markets fund manager Aberdeen Asset Management, and Asia-focused banks HSBC Holdings and Standard Chartered. All have been punished by the emerging markets downturn but may benefit from a revival.
Or you could try household goods giants Reckitt Benckiser Group and Unilever, which have shrugged off the downturn but may still cash in when emerging markets consumers are feeling richer again. There are signs of upward motion already, with Aberdeen up 26% in the last three months.
Emerging markets have been in a sweet spot before, so let’s hope analysts aren’t over-sugaring this one.