Emerging-market stocks hit a record high for the first time since November, 2007, on Friday as the combination of post-COVID 19 recovery hopes, mass global stimulus and a weak dollar boosted investor confidence.
MSCI’s main emerging-market index, which covers nearly 1,400 companies across 27 developing-world countries set the new record as it topped 1,345 points, a milestone that also took its surge since March’s lows to almost 80 per cent.
Investors have stampeded back into emerging assets in recent months, with record monthly inflows in November helping offset the record exodus seen in March as the pandemic shuttered much of the global economy.
The weak dollar flatters home earnings for emerging-market companies in dollar terms and make foreign-currency debt payments easier, said Standard Life Aberdeen investment director Nick Robinson.
“And there are just a lot of stocks that are benefiting from this [global] rotation from growth to value,” he added, highlighting mining companies as one sector that has been “on a real tear lately”.
MSCI’s EM index has a bigger share of mining, energy and financials than the all-world equivalent. It is still heavily weighted toward Asian technology and internet giants however.
Taiwan Semiconductor Manufacturing Company (TSMC), Chinese duo Alibaba Group Holding Ltd. and Tencent Holdings Ltd. and Korea’s Samsung Electronics Co. Ltd. account for roughly 20 per cent of the index. Adding all tech and communications companies plus internet-focused firms like Alibaba adds up to more than 40 per cent of the index.
Developing markets have gained additional momentum this week after the U.S. Congress formally certified Joe Biden’s presidential election victory. That has given investors hope that a Democratic-controlled government will lead to heavy spending, supporting global appetite for riskier assets.
MSCI’s index of emerging-market currencies also touched records earlier this week, while bond spreads have tightened to near prepandemic levels.
There have been some bumps, however. U.S. sanctions against a raft of Chinese firms will see MSCI and other index providers cut three Chinese telecom companies – China Mobile , China Telecom and China Unicom Hong Kong – from their benchmarks.
The announcements, which means passive funds may have just a day to adjust billions of dollars of investments, wiped a combined US$5.6-billion off the value of their Hong Kong-traded shares on Friday and there are worries more companies could also be it.
Nevertheless, the hope of a recovery from COVID-19 and normalization of the world economy has seen MSCI’s EM index overtake the S&P 500 in terms of performance for the past year, although it still lags well behind the tech-heavy Nasdaq.
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