Emerging markets submerged

by: , Managing Director and Senior Portfolio Manager, New York Life Investment Management

Tough sledding

Emerging market (EM) stocks, bonds, and currencies have experienced heavy redemptions in recent months, driving pricing sharply lower.

MSCI All-World Ex. U.S., MSCI E.M., and S&P 500 Index

Source: All data as of 7/13/18. MSCI All-World Ex. = MSCI World excluding USA Index; MSCI EM = MSCI Emerging Markets Index; S&P 500 = S&P 500 Index. Past performance is no guarantee of future results. An investment cannot be made directly into an index. Index definitions found at the end of this blog post.

Among the biggest decliners in the emerging markets are Argentina, Turkey, Brazil, and China. We attribute the weakness to several interrelated factors:

  1. Dollar strength: Recent increases in the dollar can be problematic for EM economies with significant external financing needs or large dollar-denominated debt balances.
  2. Monetary policy: Central banks shifting from quantitative easing to quantitative tightening is mopping up global liquidity, redirecting capital flows, and driving up debt capital costs within the EM complex.
  3. Escalating trade protectionism: Many EM countries depend on in the expansion of global trade to fuel growth. Combative trade policies can damage sentiment, disrupt supply chains, fuel inflation, eliminate jobs and lead to demand destruction.

Is this an opportunity?

“Buy on the sound of canons.” – Nathan Rothschild.

Much of the damage to financial markets across the developing world was inflicted in anticipation of a trade war and a retreat from globalization. Now that trade negotiators have migrated from threats to tangible action, it might be time to buy, as an abatement of hostilities could lead to a surge in pricing (buy the rumor, sell the news). A trade war is in no nation’s self-interest: it can be “won” only by losing less. Our trading partners certainly don’t welcome this conflict, and Congressional Republicans are beginning to push back on the Trump administration’s tariff strategy. A negotiated settlement remains a distinct possibility.

“You’ll always miss 100% of the shots you don’t take.” – Wayne Gretzky

Fundamentals are supportive, with strong economic growth in the U.S., Europe, China holding up better than many expected, and global trade volumes still expanding. Valuations have reset at attractive levels, redemptions appear to be stabilizing, and relative strength indicators have bottomed out at oversold levels. The long-term case for EM also remains intact. Many of these countries are younger, less indebted, and less constrained than their developed counterparts. EM financial markets have been depressed by menacing talk of trade wars – remove that threat and there could be quite a lot of upside.

Bottom Line

We find ourselves in a cautiously optimistic stance. The risk of a broad emerging markets financial crisis akin to that of the late ‘90s remains low for the time being, but volatility is likely to persist. Despite our high conviction belief that emerging market equities will perform well over an extended period, we are only modestly overweight emerging markets economies at present, less so than earlier in the year, as we are mindful of the potential for protectionism to yet inflict material harm.

The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are as of the date of this report, are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in this material will be realized.

About Risk

All investments are subject to market risk, including possible loss of principal. Stocks and bonds can decline due to adverse issuer, market, regulatory, or economic developments. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner, or that negative perception of the issuer’s ability to make such payments may cause the price of that bond to decline. A bond’s prices are inversely affected by interest rates. The price will go up when interest rates fall and go down as interest rates rise.

Foreign securities can be subject to greater risks than U.S. investments, including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information, and changes in tax or currency laws or monetary policy. These risks are likely to be greater for emerging markets than in developed markets.

Index performance is shown for illustrative purposes only and does not predict or depict the performance of the Funds. Indices are unmanaged, include the reinvestment of dividends, and cannot be purchased directly by investors. Past performance does not guarantee future results.
International Monetary Fund – an international organization that promotes the stabilization of the world’s currencies and maintains a monetary pool from which member nations can draw in order to correct a deficit in their balance of payments: a specialized agency of the United Nations.

The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) designed to measure equity market performance in global emerging markets.

The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries*–excluding the United States. With 1,016 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock-market performance. Index results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index.

New York Life Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302.


Jonathan Swaney

Managing Director and Senior Portfolio Manager, New York Life Investment Management

Jon is a Managing Director and Senior Portfolio Manager with New York Life Investment Management’s Multi Asset Solutions (MAS) team. His current focus is on management of the MainStay and third party asset allocation strategies.

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