Is Turkey a Reason to Sell EM?

Emerging market (EM) equities have experienced significant selling pressure this month amid the U.S. and China’s ongoing trade dispute and the crisis in Turkey, which has sparked contagion fears and threatened to send the country into recession. After yesterday’s 1.8% decline, the MSCI EM Index is down 9.9% year to date, well behind the nearly 7% return for the S&P 500 Index. So is EM a sell now?

Although we think EM contagion fears may be overdone, there has clearly been some fundamental deterioration in the space. As LPL’s Chart of the Day shows, earnings estimates for EM have come down in recent months, while U.S. estimates have continued to move higher. We know the adage: “Earnings drive stock prices.” There’s a lot of uncertainty, and EM can be extremely volatile in stressful times. So it’s a sell, right? Not necessarily.

EM Earnings Expectations Have Fallen as U.S. Estimates Have Risen

“Despite the Turkey situation, EM broadly has many solid fundamentals, including economic growth, favorable demographics, and attractive valuations,” says LPL Research Chief Investment Strategist John Lynch. “We look for an eventual compromise on trade, suggesting the potential for a pivot in EM performance.”

EM volatility may continue for a little while longer as these clouds take time to clear. But once they do, we think investors who have maintained some exposure to EM will be glad they did. For suitable investors, we suggest modest EM allocations because of the risks involved, and continue to favor US large cap stocks for the majority of equity investing portfolios. Look for more of our thoughts on Turkey and EM in our next Weekly Market Commentary.

IMPORTANT DISCLOSURES

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The MSCI EAFE Index is made up of approximately 1,045 equity securities issued by companies located in 19 countries and listed on the stock exchanges of Europe, Australia, and the Far East. All values are expressed in U.S. dollars.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey

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All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

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