After a steep selloff triggered by trade tensions, a strong dollar, China’s economic slowdown, and crisis in Argentina and Turkey, emerging markets regained momentum as investors are betting hugely on their rebound in the coming months. In fact, this has pulled in billions of dollars into emerging market ETFs.
Per Bloomberg report, U.S.-listed ETFs that track developing countries, along with targeted country-specific ETFs, attracted $1.28 billion for the week ended Nov 23, marking the sixth consecutive week of inflows. This brings total inflows of around $20.5 billion for the year. The renewed optimism came on the heels of a soft view from the Fed, hopes of a trade truce between the United States and China at the G-20 meeting and expectations of a weaker dollar in 2019.
Fed officials hinted toward easing of the multiple interest rate hikes next year as the global economy is slowing down. According to a recent Reuters poll, a significant majority of economists surveyed over the past week say the Fed will slow the pace next year. Meanwhile, a new CNBC Global CFO Council survey found that 45.9% expect two rate hikes in 2019, while 40.5% expect three. Since the last Fed meeting in November, the federal fund futures market shows market’s expectation of two or more rate hikes in 2019 dropping to around 37% from 67%, meaning those futures now forecast one to two rate increases next year.
That said, Morgan Stanley upgraded emerging market stocks to overweight from underweight with the top countries including Brazil, Thailand, Indonesia, India, Peru, and Poland.
Additionally, emerging market valuations look extremely cheap, indicating a long-term buying opportunity. According to a report from Yardeni Research, stocks in the MSCI Emerging Markets Index are currently trading at 10.4 times estimated earnings for the next 12 months. This is much below 15.6 times estimated earnings for the next 12 months for the American equities and 12.7 times the EAFE. Notably, the MSCI Emerging Markets Index, which measures stocks in 24 economies, has fallen around 16% so far this year.
