Many of Wall Street’s strategists state that investors should begin to sell their U.S. stocks and begin investing in emerging markets.
The MSCI Emerging Markets Currency Index increased to finish at the best weekly performance since February. Meanwhile, the local-currency government bonds increased 0.5% and are at their highest since March.
The reason for this sudden interest in emerging markets is valuation. Right now, the premium on developed markets is over their emerging market counterparts. S&P 500 Index has outperformed the benchmark that MSCI Emerging Markets index set by over 18%. In this index, the P/E ratio for world markets was over 5 points higher than that of emerging markets. The American market is becoming too expensive to invest in.
Tundra Fonder, who oversee $400 million in assets, took their first step in investing with Turkey. They also see opportunities in Malaysia and the Philippines.
Morgan Stanley is taking more of a neutral outlook on emerging markets. They have increased the rate for Mexico to “like,” while removing the “dislike” from Argentina and Russia.
Currently, China has a 30% weight in the MSCI Emerging Markets Index. Through the Hong Kong exchange, investors around the globe have purchased over $29 billion of Chinese stock this year. Their shares are currently at their cheapest since 2014. When we look at past trends, there is a 69% chance they are going to increase and a 100% chance that they are going to bring in a positive return. After the trade war loses intensity, China is going to come out the winner along with those that bought shares.
Before the trade war began, China had a bear market. Investors were leaving out of fear of becoming entangled in the country’s ongoing deleveraging campaign. The campaign was much more likely to lead to the downfall of private businesses than those run by the state. Their worry was justified, as company operating conditions are becoming worse. Many have to keep their inventory longer while taking more time to turn their working capital into money.
Even before this, private companies were already feeling pressure. Now Bejing tax authorities are asking smaller businesses to give 30% on top of an employee’s pay to the social security system.
As Standard Chartered’s Robertson has said, as a buyer, you are harvesting the volatility.