With better than expected global data and an emerging market turnaround, Dirk Hofschire, senior vice president of asset allocation research, offers insight on what this may mean for investors in his monthly market catch-up with Lars Schuster, institutional portfolio manager for Strategic Advisers, Inc., a Fidelity Investments company.
|Q:||Let’s review the markets over the past month of August.|
HOFSCHIRE: Although volatility has picked up somewhat in September, the overarching tone of the markets has been relatively positive. For one reason, we've had easier monetary conditions than many people expected as the U.K. moved to ease its policy further, and many central banks around the world are saying "lower for longer" with their interest rate policies.
The other thing that has happened is we've had some better global economic data, at least better than expected. And in this environment, despite recent volatility, equities have done reasonably well. Emerging market equities—those of developing economies—have actually outperformed and are doing pretty well year to date. It's a big turnaround from where they've been the past several years.
|Q:||What's been driving the emerging market turnaround over the last eight months?|
HOFSCHIRE: To answer that question, I think you need to go back and think about why they’ve underperformed over the past few years coming in to 2016. So, looking back at the mid-2000s, we had a big global boom. It was really a trade, industrial, and commodity boom that was centered on very high growth in China. And it turned into a recession three or four years ago as China built up a lot of industrial excess capacity, and this hurt some of the other emerging markets, like South Korea and Taiwan, that depend on those exports.
You also had slower demand for commodities out of China that hit some of the countries you mentioned, like Brazil and Russia, that are commodity exporters. The worst of this trend, I believe, was back in 2015. In 2016, it has been more about China and the global economy stabilizing. So, even though we’re at a slower pace of growth today than we were a few years back, many emerging markets are now improving off of a very low base. And, in the near term, the markets care the most about whether conditions are getting better or getting worse, and now they are actually getting quite a bit better in a number of emerging economies.
|Q:||What does that mean for investment implications and your outlook?|
HOFSCHIRE: Let’s shift back to the U.S. economy for a second. The U.S. economy is doing quite well. Labor markets are still tightening, the consumer is very positive, so there is no real risk in the near term, in my mind, of a recession on the horizon. But we are probably headed toward the late cycle at some point.
So from a U.S. standpoint, we’re still fairly constructive overall but we're thinking about it from an investment standpoint. It's not necessarily the time you take on a lot of extra risk. For emerging markets, late cycle in the U.S. is typically a time when the emerging markets do relatively well.
And over the longer term, it's also important to remember that many of these emerging markets have more favorable growth outlooks. Plus, relative to advanced economies, many actually have equity valuations that are less expensive than their developed-market counterparts today. So, overall, I think of emerging markets as an important component of a well-diversified global equity portfolio.
Past performance is no guarantee of future results.
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