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Which offers more compelling opportunities for investors now: emerging markets or developed markets? As investors consider reallocating their portfolios heading into the second half of 2020, we share our views on this subject to help them navigate across asset classes and make informed investment decisions for the remainder of the year and beyond:
Despite the uncertainty surrounding COVID-19, we believe emerging markets growth prospects are increasingly relevant to the global economy. As illustrated in the graph below, the emerging markets growth trend should pick up and outpace developed markets growth. According to the International Monetary Fund estimates dated April 2020, for the Emerging Markets and Developing Economies group, growth (as measured by real GDP) is expected to decrease to -1.0% in 2020 and increase to +6.6% in 2021. Advanced Economies growth is projected to plummet to -6.1% levels in 2020 and bounce back to +4.5% in 2021. To summarize, Global Economic growth is estimated to be negative -3.0% in 2020, primarily driven by Advanced Economies’ underperformance; and increase to +5.8% in 2021, as a result of Emerging Markets & Developing Economies driving that global growth effort forward. The estimated emerging markets growth trajectory, coupled with low inflation targets1 set by countries’ independent central banks, make emerging markets a compelling investment opportunity for global investors.
Source: IMF Staff Calculations. As of April 2020.
Over the last 10 years, global investors have been chasing the same assets: the safest government bonds, investment-grade corporate bonds, technology stocks and dollar-denominated assets.2 This trend in allocations has led developed markets, like the U.S., to become overvalued and overcrowded. A thoughtful allocation to emerging markets may help protect against such massive herding risk.
Source: Bloomberg. As of 31/5/2020.
Currently, emerging markets stocks are trading at a discount vs. developed markets, as outlined in the graph below. We are optimistic that our emerging markets portfolio company valuations will increase over time, as emerging markets are catching up with the developed world. Companies on the VanEck Emerging Markets Equity Strategy’s Focus List, for example, are reporting solid numbers and are relatively cheap versus historical estimates or current DM valuations for our estimated operating profitability growth. Their balance sheets are in good shape, generating strong cash flows over a three- to five-year time horizon.
In terms of the price-to-book value, stocks in the MSCI Emerging Markets Equity Index have been trading at a major discount in comparison to those of developed markets, as highlighted in the graph below.
Within emerging markets, we believe that growth will continue to outpace value. This is partly driven by much of the value in emerging markets being represented by companies with highly cyclical (and economically dependent) earnings streams, combined with larger state ownership. We call this “value-for-a reason.” In addition, as many value strategies are predicated on some form of mean regression in their valuation methodologies, the accelerating disruption that we see across industries can make value investing quite challenging.
With the emphasis on growth as the driver of future emerging markets and global economies, coupled with attractive valuations and a compelling case for investors’ total portfolio diversification, the VanEck Emerging Markets Equity Strategy is well positioned to identify and invest in exceptional, structural growth companies that are front and center, and the potential future, of emerging markets and global economies!
1 Based on the Economist article “Away from the Crowd” published on October 26, 2019, most of the 25 emerging market economies listed on the indicators page of the publication have inflation below 4%.
2 As cited in the Economist article “Away from the Crowd,” published on October 26, 2019.
Investing in emerging markets, of which frontier markets is a subset, involve a heightened degree of risk, including smaller sized markets, less liquid markets and other risks associated with less established legal, regulatory and business infrastructures to support securities markets.
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This commentary originates from VanEck Investments Ltd, a UCITS Management Company under Irish law regulated by the Central Bank of Ireland and VanEck Asset Management B.V., a UCITS Management Company under Dutch law regulated by the Netherlands Authority for the Financial Markets. It is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck Investments Ltd, VanEck Asset Management B.V. and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this commentary. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the commentary’s publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index.
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