Voting for Emerging Markets

Many investors are confused on how to vote. Not just in November’s presidential election but also in their portfolios. In our Midyear Outlook 2016 publication, we suggested that suitable investors may consider selecting emerging markets. This asset class has been out of favor with investors for several years, and as a result, it is one of the few asset classes that appear inexpensive, on a relative or absolute basis. We all know that valuations are not enough to spark, much less sustain, an equity market rally. Emerging markets need two other factors to fully earn your vote for a full term in office.

All foreign equities, but especially emerging markets, benefit greatly from a stable or even weakening U.S. dollar. The direction of the dollar is one of the largest factors impacting the performance of the asset class relative to U.S. stocks.

The other factor impacting emerging markets is earnings. When we talk about companies in these countries, the discussion frequently hinges on macroeconomics and geopolitics. Investment committee meetings quickly resemble graduate political science seminars. However, despite the additional factors impacting emerging markets, it is still earnings and earnings expectations that drive equity prices (see the chart below).

Emerging markets are starting to attract investor attention not just because of valuations, but because investors are beginning to forecast meaningful earnings improvements. It still may be early days in this rally, and there have been head fakes previously, but recent market activity and corporate fundamentals suggest that emerging market equities are working hard to earn your vote for the comeback asset class of this market cycle.

07-19-16 blog Figure1_1

For more on emerging markets, view our blog post from yesterday, “Checking Back In On Emerging Markets.”

Also, view the Midyear Outlook 2016: A Vote of Confidence.

IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

Economic forecasts set forth may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

The MSCI Emerging Markets Index is a free float-adjusted, market capitalization index that is designed to measure equity market performance of emerging markets.

This research material has been prepared by LPL Financial LLC.

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