Reuters
- There's a growing consensus on Wall Street that emerging-market stocks, which were battered and bruised last year, are poised for a sharp rebound in 2019.
- The group has rallied this year after many major indexes fell into bear markets in late 2018. But they've trailed US equities so far in 2019, suggesting room for upside.
Experts across Wall Street are getting much more optimistic about emerging-market stocks after a brutal 2018 - but investors don't seem to have caught up.
Sure, the stocks have surged so far this year, along with the rest of the market - a welcome development for investors that saw the main stock indexes of Hong Kong, China, South Korea, Mexico, and Turkey all tumble into bear markets during 2018.
But the 10% return in the benchmark MSCI Emerging Markets index has lagged the S&P 500 by more than a full percentage point during the period. That gap - which comes after US stocks also beat EM stocks last year - is one reason experts think EM stocks look inexpensive today.
Ajay Kapur, Bank of American Merrill Lynch's head of APAC and global EM strategy, joined the growing chorus this week. He acknowledged that corporate and economic fundamentals may not be where many investors want right now, but he said they should consider buying EM anyway.
Growing liquidity and looser financial conditions are paving the way for fundamentals to improve over the longer term, which is reason enough to load up right now, according to Kapur. He said some of his firm's clients are frustrated about missing the rally so far, and he attributes that to them failing to understand why they should be bullish.
Kapur also noted that markets in Russia, Peru, China, Turkey, and Chile have all fallen sharply in spite of relatively small cuts in earnings expectations. More specifically, he said the software sector and companies like Alibaba and Baidu have also sunk further than their earnings estimates would justify.
This chart suggests that those kinds of losses often turn to big gains the next year.
BAML Global Research, MSCI, IBES, FactSet
Kapur is far from alone. The EM space has also captured the attention of some of the most respected names on Wall Street. Here's a rundown of other notable experts predicting strong gains for emerging markets.
1) Jeremy Grantham, strategist and co-founder of Grantham, Mayo and van Otterloo
The widely respected Grantham - who successfully predicted the last two financial bubbles - says he thinks the stocks should provide good returns over many years. He agrees that they're inexpensive, although he says a lot of patience and willingness to take short-term losses might be required.
2) Kate Moore, chief equity strategist at BlackRock Investment Institute
Moore said in December that fundamentals for EM stocks haven't gotten any worse despite the calamitous drops in stock prices. But she acknowledged that a year earlier, she thought 2018 would be a good year for the stocks as the global economy kept growing.
3) David Kelly, chief global equity strategist for JPMorgan Asset Management
Kelly says the stocks have tumbled to inexpensive and attractive prices. He said most US investors aren't buying enough of them. As for recessionary fears, Kelly said there are few signs that the overall global economy will melt down, quelling one of the biggest fears around EM.
4) Vincent Deluard, macro strategist at INTL FCStone
Deluard says emerging markets will replace US tech giants as the market's leaders. He calls them a good hedge against a weakened US dollar. He added that many of the stock drops last year happened for reasons that were unique to individual countries and don't suggest deep problems for the broad, diverse emerging markets sector.