Lost decade on emerging stock exchanges may have come to an end

(Bloomberg) – Expectations of a recovery in commodity prices and growth in corporate earnings are backing bets on stock appreciation in emerging markets. The move comes after more than a decade of underperformance, which left the category close to its lowest level in 20 years compared to developed country exchanges.

Goldman Sachs Group, Bank of America and Lazard Asset Management are all expected to rise in developing market shares as investors take the opportunity to buy cheap stocks in light of accelerating vaccination, which will help the global economy recover from the pandemic.

South Africa, Russia and Brazil are expected to benefit, although regulatory repression in China continues to weigh on Asian stock markets.

In the decade following the global financial crisis, the MSCI’s Emerging Markets Stock Index advanced just 8%, while the benchmark index for developed nations more than doubled.

This is partly due to the slowdown in economic growth in China – from more than 10% in 2010 to around 6% by the end of the decade – which has led to falling commodity prices and a weak expansion of corporate profits.

And then came the pandemic. In general, stocks rebounded strongly from the lows reached in March 2020, but emerging market equities fell behind again.

MSCI’s Developed Markets Stock Index has returned approximately 15% since the beginning of 2021, while its Emerging Markets counterpart has fallen by more than 4%.

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That could change in the coming months as the global economic recovery gathers steam, inflation soars and commodity prices rebound from their worst weekly performance since June, driven by infrastructure projects from China to the US.

There are signs that the turnaround has already started. Capital flows to Eastern European, Middle Eastern and African equities have accelerated since March and have had the biggest advantage over fixed-income funds since 2014, following the migration towards value equities, according to BofA.

“We hope that this trend continues, considering the macroeconomic factors and the evaluation of the shares”, said Jure Jeric, multimarket strategist at BofA, in a report.

So far, the energy sector has been the biggest beneficiary, supporting Russian stocks, but there is room for higher inflows in other value sectors, including finance and raw materials, benefiting South Africa, he added.

Goldman Sachs is “fairly optimistic” tactically on developing country stocks, said Caesar Maasry, head of the emerging markets strategy team, which signals a preference for stocks and currencies in Brazil, Mexico and Russia. “The ‘return to normality’ is usually not built into market prices,” he says.

In Franklin Templeton Investments’ view, the tech sector will boost emerging market exchanges, benefiting countries like South Korea and Taiwan, where benchmarks fell 3.5% and 3.8%, respectively, last week.

These two countries managed to better manage the pandemic, and the prevalence of technology companies on these exchanges attracted investors during the crisis, explained Andrew Ness, portfolio manager at Franklin Templeton.

The institution remains cautious on emerging market equities, but has become more optimistic because the shares are cheap, said Gene Podkamine, head of research at Franklin Templeton Investment Solutions.

Although GDP growth in emerging markets was lower than that presented by developed nations in 2021, this could start to change as early as the fourth quarter due to the slowdown in activity in developed economies and the appreciation of commodities, according to Lazard.

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