Emerging Markets

Are EM equities set for a bounce?


Emerging market equities have had a good month, outperforming their developed market rivals and managing to avoid some of the harsher sell-offs, data show, leading some analysts to reassess their outlook for the region this year.

The MSCI Emerging Markets index is up over 3 percent in the last week, climbing with its developed market peers, on a month view it is down around 0.8 percent, beating the MSCI World and the developed market MSCI EAFE, which was down around 2 percent on the month.

Mark Ralston | AFP | Getty Images

While short periods of outperformance are not enough to go on, senior markets economist at Capital Economics, David Rees, said the expected EM slowdown for this year has been overdone, and he expects a small pick-up in growth both in 2016 and next year.

"Admittedly, this is partly due to recessions in Brazil and Russia becoming less bad. But there are more positive stories out there too: Central European economies are motoring ahead and, more importantly, we think that growth in China will accelerate this year rather than slow further," he said.

"All of this chimes with our forecast for the MSCI Emerging Markets Index to rise by about 25 percent by the end of next year," he added.

Risks clearly exist, particularly among EM countries with outsized debt growth and strong dependence on commodity exports or China. Add to the mix the prospect of a rising dollar and low-for-longer commodity prices and a number of concerns remain.

EMEA high-yield bonds suffer worst month since 2009

But at current prices, investors might be more than fairly rewarded, according to senior economist at Morningstar, Francisco Torralba.

"For emerging markets, China's slowdown, debt, and the cyclical position of the U.S. economy all suggest caution and low-return expectations in the medium term. But in the short term, as with high-yield bonds, this might be a good point of re-entry for skilled, discerning, tactical investors with a stomach for volatility," he said.

Strategist at UBS, Bhanu Baweja said avoiding emerging market financial stocks is one way to miss some of the major downside.

"We think going underweight EM financials against developed market financials is the direct way of benefitting from the negative feedback loop between financials, sovereigns and corporates in EM," he said.