As stocks hurtle towards a crash, one area of the market has stayed shockingly strong - and it could be a saving grace for investors

Advertisement
As stocks hurtle towards a crash, one area of the market has stayed shockingly strong - and it could be a saving grace for investors

fearless girl nyse

Getty Images / Atilgan Ozdil

Advertisement
  • As US stocks have come under serious selling pressure in recent months, one surprising area of the market has stayed comparatively resilient.
  • Two Wall Street experts explain why they think investors can avoid widespread equity losses by hiding out in this corner of the market, which they say should remain a beacon of stability.

US stocks have been battered and bruised over the past few weeks, leaving many investors wondering if this is finally the big market crash that will derail the almost 10-year bull market.

And they would seem to have reason to worry. The benchmark S&P 500 is down roughly 15% from record highs reached in September, and the tech-heavy Nasdaq has flirted extensively with bear market territory

Those declines accelerated last week after Federal Reserve Chair Jerome Powell failed to give investors the dovish monetary-tightening outlook they craved so badly. Now, as we head into year-end, there's a troubling lack of positive drivers that could provide relief.

But as all of this has roiled stocks, one corner of the market has held up shockingly well: emerging-market equities. While one might normally lump them in with other risk assets, EM stocks have remained comparatively insulated from recent selling, falling just half as far as the US market since mid-September peaks.

Advertisement

Read more: We interviewed Wall Street's 8 top-performing investors to get their best ideas for 2019

"Emerging markets are not normally considered a safe place to hide during severe stock market corrections - but they have been in the latest equities swoon," Jim Paulsen, the chief investment officer at Leuthold Group, wrote in a recent client note.

Recent data from Bank of America Merrill Lynch found that EM stocks attracted $4.5 billion over the last week, their biggest inflow since February. They've now absorbed $21 billion over the past 10 weeks, which coincides with their relative outperformance over the period.

So why have they held up so admirably? Leuthold says it's because their more economically sensitive sectors have outpaced the corresponding industries in the S&P 500. They also say it's an encouraging sign that cyclical EM stocks have recently beaten their defensive US counterparts.

Advertisement

Beyond that, they find valuations attractive, given EM's laggard status for much of the past few years.

"Their long-term chronic underperformance seems to be ending, with a three-year relative performance bottom, and they have recently outperformed during a broad-based correction," Paulsen said.

Read more: We just got the most alarming sign yet that investors are bracing for a stock market crash

Paulsen also highlighted several other reasons why investors should consider hiding out in EM stocks as turbulence rocks the market - something that would've been unthinkable until very recently.

He noted that while EM economies have slowed considerably, the US hasn't followed suit to the same degree. When the US does start to decelerate, that could favor EM, according to Paulsen. In addition to that, he says EM will get the biggest possible boost from a possible trade-war resolution, while also reaping the benefits of any sort of weakness in the US dollar.

Advertisement

And Paulsen isn't alone in his quest to convince people that EM could be a great bet for 2019. His thoughts are shared by Kate Moore, the chief equity strategist at the BlackRock Investment Institute.

In a recent interview, Moore explained to Business Insider why she and her firm are overweight EM stocks heading into next year. She cited strong earnings and sales growth, as well as robust margins and attractive valuations.

"We don't actually see a deterioration in fundamentals, even though EM has de-rated more than other regions," Moore said. "So we're sticking with our overweight call for 2019."

{{}}