The Case for and Against Investing in Emerging Markets Now
Kanebridge News
    HOUSE MEDIAN ASKING PRICES AND WEEKLY CHANGE     Sydney $1,580,369 (+1.46%)       Melbourne $968,248 (+0.35%)       Brisbane $884,749 (+1.39%)       Adelaide $811,373 (-0.34%)       Perth $760,863 (-2.94%)       Hobart $742,968 (+1.78%)       Darwin $648,153 (+0.66%)       Canberra $952,739 (+1.89%)       National $998,019 (+0.96%)                UNIT MEDIAN ASKING PRICES AND WEEKLY CHANGE     Sydney $719,049 (-0.09%)       Melbourne $491,976 (+25.26%)       Brisbane $488,613 (+1.66%)       Adelaide $415,517 (+2.98%)       Perth $408,247 (-0.12%)       Hobart $506,404 (-0.82%)       Darwin $341,678 (-4.94%)       Canberra $481,116 (-2.08%)       National $504,022 (+1.79%)                HOUSES FOR SALE AND WEEKLY CHANGE     Sydney 10,856 (+1,115)       Melbourne 15,164 (+2,253)       Brisbane 8,441 (+272)       Adelaide 2,729 (+236)       Perth 6,841 (+1,523)       Hobart 1,229 (+73)       Darwin 276 (-10)       Canberra 1,109 (+217)       National 46,645 (+5,679)                UNITS FOR SALE AND WEEKLY CHANGE     Sydney 8,816 (+356)       Melbourne 8,019 (+4,046)       Brisbane 1,858 (+11)       Adelaide 509 (+3)       Perth 1,903 (-10)       Hobart 172 (+1)       Darwin 395 (+4)       Canberra 856 (+152)       National 22,528 (+4,563)                HOUSE MEDIAN ASKING RENTS AND WEEKLY CHANGE     Sydney $780 (+$30)       Melbourne $570 ($0)       Brisbane $600 (-$30)       Adelaide $570 ($0)       Perth $630 (+$5)       Hobart $550 ($0)       Darwin $700 (+$5)       Canberra $680 (+$5)       National $644 (+$4)                UNIT MEDIAN ASKING RENTS AND WEEKLY CHANGE     Sydney $730 (-$30)       Melbourne $550 ($0)       Brisbane $625 (+$25)       Adelaide $450 (-$10)       Perth $575 (+$5)       Hobart $450 ($0)       Darwin $550 (-$10)       Canberra $565 (+$5)       National $575 (-$3)                HOUSES FOR RENT AND WEEKLY CHANGE     Sydney 5,423 (+399)       Melbourne 5,636 (+347)       Brisbane 4,280 (+665)       Adelaide 1,158 (+16)       Perth 1,894 (+159)       Hobart 373 (-3)       Darwin 149 (+7)       Canberra 629 (+31)       National 19,542 (+1,621)                UNITS FOR RENT AND WEEKLY CHANGE     Sydney 8,616 (+1,782)       Melbourne 5,988 (+275)       Brisbane 2,048 (+24)       Adelaide 365 (+22)       Perth 605 (-3)       Hobart 155 (+3)       Darwin 294 (+2)       Canberra 716 (+54)       National 18,787 (+2,159)                HOUSE ANNUAL GROSS YIELDS AND TREND       Sydney 2.57% (↑)        Melbourne 3.06% (↓)       Brisbane 3.53% (↓)     Adelaide 3.65% (↑)      Perth 4.31% (↑)        Hobart 3.85% (↓)     Darwin 5.62% (↑)        Canberra 3.71% (↓)       National 3.35% (↓)            UNIT ANNUAL GROSS YIELDS AND TREND         Sydney 5.28% (↓)       Melbourne 5.81% (↓)     Brisbane 6.65% (↑)        Adelaide 5.63% (↓)     Perth 7.32% (↑)      Hobart 4.62% (↑)      Darwin 8.37% (↑)      Canberra 6.11% (↑)        National 5.93% (↓)            HOUSE RENTAL VACANCY RATES AND TREND       Sydney 0.7% (↑)      Melbourne 0.8% (↑)      Brisbane 0.4% (↑)      Adelaide 0.4% (↑)      Perth 1.2% (↑)      Hobart 0.6% (↑)      Darwin 1.1% (↑)      Canberra 0.7% (↑)      National 0.7% (↑)             UNIT RENTAL VACANCY RATES AND TREND       Sydney 0.9% (↑)      Melbourne 1.4% (↑)      Brisbane 0.7% (↑)      Adelaide 0.3% (↑)      Perth 0.4% (↑)      Hobart 1.5% (↑)      Darwin 0.8% (↑)      Canberra 1.3% (↑)      National 0.9% (↑)             AVERAGE DAYS TO SELL HOUSES AND TREND         Sydney 27.6 (↓)       Melbourne 28.8 (↓)       Brisbane 30.9 (↓)       Adelaide 24.3 (↓)       Perth 34.1 (↓)       Hobart 28.7 (↓)     Darwin 36.9 (↑)        Canberra 27.6 (↓)     National 29.9 (↑)             AVERAGE DAYS TO SELL UNITS AND TREND         Sydney 28.6 (↓)       Melbourne 29.4 (↓)       Brisbane 30.6 (↓)       Adelaide 26.3 (↓)       Perth 39.8 (↓)       Hobart 22.1 (↓)       Darwin 37.9 (↓)       Canberra 33.4 (↓)       National 31.0 (↓)           
Share Button

The Case for and Against Investing in Emerging Markets Now

Economic growth is expected to be relatively strong. But these stocks also carry risks.

By Dan Weil
Mon, Jul 5, 2021 10:45amGrey Clock 4 min

Emerging markets stocks have outpaced developed-market shares over the past 12 months, making them a tempting investment option. So is now a good time to take the plunge, or should investors stay away?

On the plus side, economic growth in emerging markets is expected to surpass growth in developed markets in the next few years. And emerging-markets stocks can be useful to U.S. investors for diversifying a portfolio, since they don’t move in lockstep with U.S. shares.

But emerging-markets shares come with higher volatility than developed-market stocks and an array of risks, including political risk, currency risk, liquidity risk—and economic risk, despite the rosy projections. And investors can get exposure to emerging markets more safely with a portfolio of U.S. stocks that includes companies doing business in those markets.

“Investing in emerging markets is a high-risk, high-reward proposition,” says Eswar Prasad, a trade-policy professor at Cornell University. “Many emerging markets have done well growth-wise, and their financial markets have had periods of success, but it tends not to last too long.”

With that in mind, here’s a closer look at the cases for and against investing in emerging markets now.

The Positive Case

The biggest advantage of emerging markets today is their potential for stronger economic growth than advanced economies, investment pros say.

“About 90% of the world’s population under 30 lives in emerging markets,” says Michael Sheldon, chief investment officer at RDM Financial Group, Hightower, a wealth-management firm in Westport, Conn. “This may lead to stronger labor-market growth, increased productivity and stronger GDP and corporate profits over time.”

In contrast, developed countries have rapidly expanding senior populations and low birthrates, which makes it more difficult to find workers to fill new jobs, says Karim Ahamed, investment strategist at Cerity Partners, a wealth-management firm in Chicago. That can limit economic growth.

The International Monetary Fund forecasts average annual GDP growth of 5.5% for emerging markets in 2021-23, compared with 3.5% for advanced economies.

Emerging markets also represent diversification opportunities for U.S. investors. That’s partly because economic growth and financial-market performance in emerging markets are less correlated with the U.S. than advanced economies and financial markets are. In addition, emerging markets give U.S. investors currency diversification, which can be helpful when the dollar is weak.

While investors can gain exposure to emerging markets through stocks of U.S. companies that earn revenue from those markets, those stocks won’t give investors the full diversification benefit, Prof. Prasad says.

The strong economic and corporate performance that is boosting emerging-markets stocks also makes their bonds attractive, says Robert Koenigsberger, chief investment officer at Greenwich, Conn.-based Gramercy Funds Management, which specializes in emerging markets.

Inflation is less of a problem in most major emerging markets today than it has been at times in the past. Also, emerging-markets countries’ external deficits generally have narrowed, or totally reversed in some cases. “This should give emerging-market central banks more flexibility to absorb external shocks and deal with post-pandemic inflationary pressures, allowing them to tighten monetary policy without slowing growth momentum too much,” Mr. Koenigsberger says.

The Negative Case

Emerging-markets stocks are more volatile than those in advanced economies. The MSCI Emerging Markets Index had a standard deviation of 18 over the past 10 years, compared with 14 for the MSCI World Index of developed markets, according to Morningstar. Standard deviation measures volatility, with a higher number representing more volatility.

The factors behind that higher volatility in emerging markets include political risk, economic risk, currency risk and liquidity risk.

And while emerging-markets economies generally have been on a sharp uptrend for years, some also have experienced serious downturns. Russia’s economy, for instance, shrank 2% in 2015, compared with 2.9% growth for the U.S. that year.

Emerging-markets currencies are a double-edged sword, providing diversification but also volatility. “When you try repatriating your investment, everything may be going wrong at the same time,” with the emerging market’s economy, financial markets and currency dropping together, Prof. Prasad says.

A declining emerging-market currency makes an investment less valuable when converted into dollars. And emerging-markets currencies aren’t only vulnerable to trouble in their own country—they also tend to decline against the dollar when the U.S. currency is gaining against other developed-market currencies like the euro or yen, regardless of what’s happening in emerging markets.

Meanwhile, market liquidity isn’t as deep in emerging markets as in advanced ones. “There’s always a risk with emerging markets: It’s easy to bring money in, but not always to take it out,” Prof. Prasad says.

On the bond side, corporate debt outstanding has soared 400% in emerging markets since 2010, Mr. Koenigsberger says. So, plenty of securities are available. But liquidity isn’t just about supply. “Due to fewer banks and smaller market-making operations at those banks, there is insufficient liquidity when investors look to exit the market” in many cases, he says.

Another issue for bond investors: “There are a handful of emerging-market countries—South Africa, Turkey and Brazil, for example—that face high debt levels and large current-account imbalances,” Mr. Sheldon says. These countries are vulnerable to capital flight, which could trigger a plunge in bond prices.

One negative factor for emerging markets in the near term is that countries such as India and Brazil are having trouble dealing with Covid-19. That will likely weigh on emerging-markets stocks this year, Mr. Ahamed says.

How To Invest

For those who want to jump into emerging markets, what’s the best way? Mutual funds and exchange-traded funds will suit most investors better than individual stocks and bonds, because researching and trading individual securities in these markets is often difficult.

When it comes to the question of actively managed funds versus passive index funds, “you can make an argument for active management to provide some downside protection,” Mr. Ahamed says. “But an ETF gives you very broad-based exposure in a way that’s generally cost effective, with lower fees.” Most ETFs passively track a market index.

For bond funds, actively managed is the way to go, Mr. Koenigsberger says. The growth of emerging-markets debt amid continuing economic challenges in many countries puts a premium on active management to sort out the winners, he says. Emerging-markets bond indexes tracked by passive funds are usually weighted by market capitalization, so the most heavily indebted issuers have higher weightings. “Emerging-market debt isn’t an asset class that is suitable for index funds,” Mr. Koenigsberger says.

Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: July 4, 2021



MOST POPULAR

Consumers are going to gravitate toward applications powered by the buzzy new technology, analyst Michael Wolf predicts

Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’

Related Stories
Money
The Stocks Investors Are Putting Under the Tree
By HARDIKA SINGH 04/12/2023
Money
Fashion’s New Look for Stores: Bigger, Better, Fewer
By TREFOR MOSS 04/12/2023
Money
Why No One Wants to Pay for the Green Transition
By GREG IP 02/12/2023
The Stocks Investors Are Putting Under the Tree

Shares of retailers including Victoria’s Secret and Foot Locker are surging despite mixed holiday updates

By HARDIKA SINGH
Mon, Dec 4, 2023 4 min

Retailers are making modest predictions about the holiday shopping season—and their stocks are going gangbusters in response.

Victoria’s Secret, Foot Locker, Ulta Beauty and Dollar Tree are among the companies that offered somewhat mixed assessments of the state of the shopper last week. Yet each received an ovation from investors.

Traders have piled into stocks en masse since a softer-than-expected inflation reading on Nov. 14 bolstered wagers that the Federal Reserve is done raising interest rates and is poised to cool the economy without tipping it into a recession. Treasury yields have sharply declined as well, giving equities a second wind.

The S&P 500 has risen 4.1% since the report, extending its gains for the year to almost 20%.

Many depressed sectors of the market, such as retailers, have risen even faster. The SPDR S&P Retail exchange-traded fund—which includes 78 retailers, from department stores and other apparel companies, to automotive and drugstores—has jumped about 13%. Victoria’s Secret has soared 52%, Foot Locker is up 50%, Ulta has risen 21% and Dollar Tree has added 12%. (Three of the four stocks have suffered double-digit percentage declines this year.)

Americans slowed their spending in October, according to last week’s consumer-spending data from the Commerce Department. But the early readings from the holiday shopping season have been more encouraging. U.S. shoppers spent $38 billion during the five days from Thanksgiving through the following Monday, up 7.8% from the same period last year, according to Adobe Analytics.

Many investors closely watch consumer spending because it is a major driver of economic growth. If spending is too strong, the Fed could be forced to raise interest rates again. Whereas, if spending is too weak, it could be a sign that the economy is entering a recession.

In the coming days, investors will look at U.S. service-sector activity for November and Friday’s monthly jobs report as they try to assess the strength of the economy and the market’s trajectory.

“The consumer has been resilient throughout it all,” said Jay Woods, chief global strategist at Freedom Capital Markets. “The economic news is now starting to back that up, that, ‘OK, we aren’t going to be in a recession. Things are getting a little bit better.’ And these stocks that had been beaten-down are finally catching a bid.”

Victoria’s Secret posted its second consecutive quarterly loss Wednesday, with the lingerie retailer facing a continued slump in sales. But the company forecast higher sales in the current quarter, sending shares up 14% the next day, their largest one-day percentage gain in more than two years. The stock is down 20% in 2023.

Footwear retailer Foot Locker said Wednesday that Black Friday sales were strong and it forecast an upbeat holiday shopping period, while reporting lower sales and profit for the third quarter. Its shares rose 16% that day, their biggest gain in more than a year, trimming their 2023 decline to 21%.

Cosmetic retailer Ulta on Thursday posted stronger-than-expected sales in the third quarter and raised the lower end of its sales and profit outlook for the year. The shares rose 11% in the following session, their best day since May 2022. They are up 0.6% for the year.

Dollar Tree reported Wednesday that same-store sales growth was weaker than analysts expected, but investors appeared to be encouraged that the discount retailer is seeing increases in customer traffic, even if basket sizes are shrinking. Its shares rose 4.4% that day and are off 11% in 2023.

Another reason why retail stocks have rallied? Warehouses have reduced merchandise, and store shelves aren’t spilling over with discounted goods.

John Augustine, chief investment officer at Huntington Private Bank, said higher interest rates and oil prices made him bearish on retail stocks over the summer. But with an easing macro environment, he believes retailers could be poised to do well.

“It seems like traffic is gonna be there for the holidays,” Augustine said. “Now can retailers make the same profit, earnings per share, with tighter inventory?”

Short sellers are licking their wounds after the recent rally. They lost about $120 million in November betting against the SPDR S&P Retail ETF, according to financial-analytics firm S3 Partners. That compares with a loss of $2.8 million through the first 10 months of the year. Short sellers borrow shares and sell them, expecting to repurchase them at lower prices and collect the difference as profit.

Many retail stocks still generally look cheap compared with the broader market. Victoria’s Secret is trading at 11.8 times its projected earnings over the next 12 months, while Foot Locker is at 16.2. The S&P 500’s multiple is 18.8.

Despite the recent excitement in markets, many investors caution that it is too soon to count on a soft landing for the economy. Jamie Dimon, chief executive of JPMorgan Chase, recently cautioned that inflation could rise further and a recession isn’t off the table.

In the past 11 Fed rate-hiking cycles, recessions have typically started around two years after the Fed begins raising interest rates, according to Deutsche Bank. This hiking cycle started last March.

“It’s not an all-clear resurgence trade that we’re in right now,” said Brock Campbell, head of global research at Newton Investment Management. “This is gonna be a much more idiosyncratic stock picker’s group for a while.”

MOST POPULAR

Consumers are going to gravitate toward applications powered by the buzzy new technology, analyst Michael Wolf predicts

Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’

Related Stories
Money
Banks Earn Billions Thanks To Higher Interest Rates
By Bronwyn Allen 16/11/2023
Money
Australia’s Unemployment Rate Continues Steady Rise
By 16/11/2023
Money
Macquarie’s 1H Profit Falls, to Launch Up to A$2 Billion Buyback
By Alice Uribe 03/11/2023
0
    Your Cart
    Your cart is emptyReturn to Shop