One More Hurdle To Clear For Emerging Markets?

In our newly released Midyear Outlook 2017: A Shift In Market Control publication, we explain why emerging markets (EM) continue to look like a nice place to find alpha, even after nearly doubling the S&P 500 Index’s performance year to date.

As the Federal Reserve powers down monetary policy in the United States, it’s worth pointing out that there is still room for EM central banks to power up monetary policy—not to mention the near-term catalyst of improving global growth, and the longer-term trend of six billion consumers in EM countries that offer a significant investment opportunity.

Some key EM highlights from our Global Economy & Markets section in the Midyear Outlook include:

  • Though historically more volatile, EM may actually provide more stability than developed markets at least over the near term, partially because of limitations on the impact of monetary policy in Europe, as well as potential risks related to “Brexit,” upcoming elections in Italy and Germany, and structural challenges such as immigration and labor market reform.
  • As has typically been the case, EM economies are dependent on Chinese demand, yet given massive investment across EM, fueled largely by dollar-denominated debt, they remain sensitive to changes in U.S. monetary policy.

From a technical standpoint, EM is at a big level of potential resistance from a downward sloping trendline going back nearly a decade. Although this trendline could pose a near-term hurdle, if EM can eventually break above this area of resistance it could usher in another period of strong outperformance.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

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.

The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

International and emerging markets investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

Alpha measures the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by beta. A positive/negative alpha indicates the portfolio has performed better/worse than its beta would predict.

The MSCI Emerging Markets Index captures large and mid cap representation across 23 emerging markets (EM) countries. With 822 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

This research material has been prepared by LPL Financial LLC.

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