In a research note just last week, Deutsche Bank’s London-based strategists John-Paul Smith, Priyal Mulji and Punyadip Cheema said they think an emerging market equity bear market versus the US will continue:
“The 68.5% underperformance of EM against US equities which has taken place since our initiation in December 2010 has been punctuated by periodic recoveries in both absolute and relative terms. We believe that the latest rally is another false dawn before increasing concern about the underlying condition of the Chinese economy causes liquidity to be withdrawn from the asset class. If this view proves to be correct, there are few obvious hiding places within GEM, as the markets with stronger domestic fundamentals are standing on premium valuations and are very vulnerable to selling by overseas investors and/or a rise in the dollar. US equities also appear somewhat vulnerable to contagion from China, albeit much less so than their EM peers, so from an EM perspective at least, dollar cash does not appear a bad place to hide.…… growth in GDP and earnings across most major emerging economies and markets have been revised down, which has in turn exacerbated the disinflationary pressures across the global economy. Whilst this resulted in weak EM equity markets over the first two months of 2014, the favourable impact of lower bond yields and the expectation of continued easy-money policies through Europe and the US against a backdrop of very bearish sentiment towards EM equities has triggered a major liquidity-driven rally. We believe that most emerging markets are now trading ahead of the underlying fundamentals, including those where the political factors have moved in favour of more capital-friendly reforms, such as India and Brazil.”
On the other hand, Richard Titherington, the chief investment officer for emerging market equities at J.P. Morgan Asset Management, has recently suggested that investors should buy emerging markets before that opinion gets more obvious. He has written:
- Stabilization across emerging market currencies is a signal of trade balance improvement as emerging market earnings catch-up.
- While emerging markets decoupled relative to developed markets because of the widening gap in economic performance, leading to a slowdown in EM profits, market declines, and outperformance of growth stocks over value stocks. But there is evidence this is starting to turn, especially as manufacturer-exporters benefit from recovering demand.
- Margins are improving, and earnings should too.
To read the whole articles, Emerging Market Rally of 2014: False Dawn, DB Says and JPM: Buy Emerging Markets Before It’s More Obvious, go to the website of Barron’s.
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