Outlook Brightening for Emerging Markets

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Market Blog
December 19, 2019

The outlook has brightened for stocks in emerging markets. A key reason is the trade agreement the United States reached with China last week, even if it’s only phase one. We acknowledge tensions could escalate again as negotiations move to the next phase, but this is still a clear positive any way you slice it. The de-escalation in trade tensions can help support the economic growth outlooks for emerging-market countries, particularly China and its key Asia trading partners.

Another reason we believe the outlook is looking better is the recent under-the-radar increase in emerging-market earnings estimates. As shown in today’s LPL Chart of the Day, consensus earnings estimates for the next 12 months for the MSCI EM Index have risen by 2.3% over the past three months, while S&P 500 Index estimates haven’t budged, and MSCI EAFE estimates have fallen by 1% (source: FactSet).

“Assuming the trade truce holds—and we suspect it will—we see potential for solid gains for emerging markets stocks in 2020,” said LPL Financial Chief Investment Strategist John Lynch. “A possible double-digit increase in emerging-markets earnings could be attractive to global investors, a scenario that may be more likely following the U.S.-China trade deal.”

Emerging-markets earnings have struggled to keep pace with U.S. earnings in recent years, but we may see the tide turn next year. We continue to favor emerging market equities over those in international developed markets, and we continue to believe a modest allocation to emerging markets equity makes sense in appropriate strategies. The recent uptick in estimates is encouraging as it corroborates the impact of the trade pact and recent evidence of stabilizing growth in recent global economic data.

For more of our investment insights on international and emerging-market equity markets, check out our Outlook 2020: Bringing Markets Into Focus.

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This Research material was prepared by LPL Financial, LLC.

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