Chinese investors check stock prices at a stock brokerage in Fuyang in central China's Anhui province Monday, April 7.The Associated Press
Emerging-market stocks are staging a comeback after delivering two straight years of losses as bargain hunters seek alternatives to sky-high valuations in the developed world.
The benchmark MSCI Emerging Markets Index is up 12 per cent this year through Tuesday, including 9 per cent this month alone. The gains in April are more than double the advance in developed markets, marking the biggest outperformance since January 2012. Brazil's Ibovespa has rallied about 20 per cent since January, joining bull markets in China, Russia and India.
With stocks in the U.S., Japan and Europe all making multi-year highs, investors are turning to countries where valuations remain more than 20 per cent cheaper than in advanced economies. China is stepping up efforts to bolster its economy, while scaled-backed expectations for a Federal Reserve rate increase are encouraging capital inflows.
"This rally has some legs," Arjun Jayaraman, who helps oversee $4-billion (U.S.) as a money manager at Causeway Capital Management LLC in Los Angeles, said via e-mail. "Valuations in emerging markets are still reasonable and the authorities are adopting simulative monetary and fiscal policies, which are helping to support the equity market."
Jayaraman's $1.7-billion Causeway Emerging Markets Fund returned 7.4 per cent annually over the past five years, beating 95 per cent of its peers tracked by Bloomberg. He favours Asian markets, including China and Taiwan while staying cautious toward Latin American stocks including Mexico and Brazil, he said.
The MSCI's emerging market index fell 0.6 per cent from a seven-month high at 12:12 p.m. in New York. The gauge dropped about 5 per cent in each of the last two years, the first back- to-back annual losses since 2002.
MSCI Inc.'s index for developed markets has climbed 5.5 per cent this year through Tuesday to a record high, while the Standard & Poor's 500 Index for U.S. stocks has risen 2.7 percent.
The emerging-markets stocks rally will "continue throughout this year," Mark Mobius, the chairman of Templeton Emerging Markets, told reporters in London on Wednesday. Gains will be spurred by a recovery in Brazil, a possible end to Russian sanctions and "don't forget" India, he said.
All the top 10 best performing stock markets globally this month are in developing nations with Chinese and Brazilian companies dominating.
The Shanghai Composite Index has surged 19 per cent in April, extending its rally over the past year to 123 per cent through Tuesday. CSR Corp. and China CNR Corp., the country's two biggest trainmakers, are among the best performers, jumping more than 47 per cent after the regulators approved the merger of the two firms.
Cheap Stocks
The Chinese central bank lowered the amount of funds lenders are required to set aside this month, adding more stimulus after cutting interest rates and rolling out measures to prop up the faltering housing market.
In Brazil, state oil company Petroleo Brasileiro SA surged this month as the company released long-delayed earnings, ending a five-month debate on writedowns related to the country's biggest corruption scandal. The local benchmark jumped to the highest since October after the government's proposed spending cuts bolstered expectations that Brazil may be able to preserve its investment-grade credit rating.
Even after the recent rally, emerging-market stocks are cheap by historical standards. The MSCI's gauge is trading at about 13 times estimated earnings for the next 12 months, or 25 per cent lower than advanced nations, according to data compiled by Bloomberg. The average discount was 19 per cent over the past five years.
Rally Fatigue
"Emerging-market equities have underperformed for a long time but may be turning," strategists including Jeremy Hale at Citigroup Inc. wrote in a note on April 23. "In terms of value, low hanging fruit is increasingly hard to come by in global equity markets. A rotation into value might support EM equity markets."
There are signs of investor skepticism about the sustainability of the gains in some emerging markets. Indonesia's Jakarta Composite dropped as much as 4.3 per cent Wednesday, the most since August 2013, as investors weighed falling corporate earnings and Australia's warning that the execution of foreign nationals will damage relations.
In China, the stock rally is increasingly at odds with slowing economic growth. Earnings in the Shanghai Composite for the first quarter have so far trailed analyst estimates by 17 per cent, according to data compiled by Bloomberg.
While JPMorgan Chase & Co.'s strategists led by Jan Loeys have updated their ratings on emerging-market stocks to neutral from sell, they are not ready to chase the rally, citing weaker growth momentum.
Fed Meeting
"We would like to see emerging-market fundamentals improving outright or just relative to developed-market, before wholeheartedly moving to overweight," Loeys wrote in a note on April 24.
Developing-nation equities started to rally in mid-March when the Fed slashed projections for the first rate increase since 2006, easing concern that higher borrowing costs will siphon capital away from developing nations. Fed officials will update their outlook for interest rates at a policy meeting Wednesday in Washington.
Historically, global stock rallies start with the U.S., then other developed markets follow before the momentum spills into emerging markets at a later stage such as now, said Mika Kannisto, a money manager at FIM Asset Management Ltd., which oversees €2-billion ($2.2-billion).