Hope Is in These Countries After Emerging Market Sell Off
NEW YORK ( MainStreet) Emerging markets overall dropped 7.5% in 2013, according to index provider MSCI, and stock markets in Latin America, Eastern Europe and Asia face selling pressure from investors.
"Many of these countries have seen their currencies decline in value and some have also seen their populations begin to protest economic conditions and push for changes in their country's governments," said Paul Jacobs, chief investment officer with Palisades Hudson Financial Group in Atlanta. "Investors who trade based on short-term news are much more inclined to sell shares in these countries rather than buy them."
The factors that have led to outflows include a reduction in the U.S. Federal Reserve's economic stimulus and slowing growth and demand for commodities from China.
"The sell off is opportunistic, but it's difficult to look at emerging markets monolithically," said Rex Macey, chief investment officer with Wilmington Trust.
Emerging markets have seen 11 continuous weeks of investment outflows while bond funds have experienced 15 weeks of outflows, according to Covestor.
"The timing to increase our allocation may be approaching," said Tom Yorke, a portfolio manager with Covestor. "These markets have always been highly volatile and therefore a double edged sword but have often provided out-sized returns."
For example, the performance of the MSCI Emerging Market Index between 1988 and 2011 exceeded the 9.45% annualized return and 773.66% total return of the S&P 500 Index during the same time period.
"Potential opportunities lie amid the political uncertainty likely to characterize 2014," said Curtis Arledge, CEO of BNY Mellon Investment Management. "In addition to questions about Fed policy in 2014 and its impact around the world, elections in some key emerging countries could have important market implications."
Countries facing elections in 2014 are Turkey, Brazil, India and South Africa.
"Emerging Markets were hit hardest in May 2013 when the U.S. first hinted at winding down support," said Gemma Godfrey, head of investment strategy with Brooks Macdonald. "They have also faced a change of policy domestically where countries such as China have looked to reign in credit expansion to quell risk of overheating."
For 2014, favored markets include Mexico and countries Southeast Asia.
"While we are underweight in emerging markets, Mexico is on our radar, because it opened up a petroleum sector and it's an extension of the U.S market," said Clem Miller, director of capital markets with Wilmington Trust. "We also like Thailand, Malaysia, Indonesia and Taiwan, because they've done quite well and are somewhat integrated with Japan."
The P/E ratio on emerging markets is only about ten times while U.S. large caps sell for more than 15 times earnings, according to ING's Doug Cote.
"Valuations of emerging markets are cheap, but we think they can be cheaper," said Dominic D'Eramo, charter financial analyst with Wilmington Trust. "Therefore we are waiting for prices to go down."