Warming up to emerging markets

BlackRock's Richard Turnill discusses the rationale behind why we have upgraded our view on emerging market equities to overweight.

We have upgraded our view on emerging market (EM) equities to overweight, as EM growth stabilizes amid a pickup in global growth and a lower-for-longer interest rate environment. This week’s chart helps explain why.


The chart above shows that EM corporate earnings have been improving, alongside a rebound in commodity prices and a recovery in EM export growth.

EM equities could attract more investors

The “lower-for-longer” interest rate outlook reduces the risk of a sharply rising U.S. dollar, expands the scope for EM rate cuts (25 so far this year), and makes high-yielding EM assets relatively attractive. Investors have been warming up to emerging markets since February, and their risk appetite appears to be broadening. Even offshore Chinese equities—a performance laggard this year—have started to catch up despite weaker July economic data from China.

EM equity exchange-traded and mutual funds have attracted $26 billion of inflows since February, reversing a fraction of the roughly $150 billion that had exited the asset class since the 2013 taper tantrum, EPFR Global data show. We see room for further inflows. Asian investors are already rotating into equities, as local bond yields have dropped to new lows under the stampede of a yield-hungry horde. EM equities are trading at a 24% discount to global developed markets on forward earnings multiples, according to Bloomberg data. Fundamentals could further improve, we believe, as EM companies focus on controlling expenses and targeting profits over market share gains.

Risks to EM equities include a sudden spike in the U.S. dollar, a renewed weakness in commodities and economic risks in China. Within EM equities we prefer countries showing economic improvement or having clear reform catalysts, including India and ASEAN countries. Read more market insights in my Weekly Commentary.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

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