Bottoms up: Is EM ready to rebound?

By: Regina Chi • December 12, 2018
Regina Chi

While there’s reason to be optimistic about an emerging market (EM) rebound in 2019, pinpointing market bottom is often elusive. Investors are more likely to capture a full recovery by implementing a long-term strategy.

After a strong start to 2018, the MSCI Emerging Markets Index lost 13.32% year-to-date through late November, according to Bloomberg data. Ongoing global trade tensions and concerns about monetary tightening by the U.S. Federal Reserve weighed on emerging markets. At the same time, the Fed’s tightening caused a rally in the U.S. dollar relative to EM currencies, and many EM countries felt the shock of a higher cost of borrowing, while those countries that had better current account deficits fared better in the face of the strengthening greenback.

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Source: Bloomberg, as of October 24, 2018

 

A rebound in the making?

There’s no question all of these headwinds could have an impact as we move into the New Year, but it may well be that much of this is already priced into the market. Consider that EM equities are currently trading at considerable double digit discounts to Canadian and U.S. equities. In other words, we believe this may be the time to buy.

Longer term, there are reasons for optimism, too. Many EM countries have vibrant domestic economies, driven by a growing middle class, especially in Asia Pacific countries. EM economies are also leading developed market (DM) economies in terms of productivity rates. In fact, productivity in EM is improving at double the rate of DM. If anything, ongoing trade tensions are a wake-up call because U.S. tariffs promise to make selling low-cost goods to American consumers less profitable. Companies are being forced to rethink their operations and products in the next wave of manufacturing. China, in particular, is moving from imitator to innovator, and up the value-chain as an advanced manufacturer to stay relevant.

For all of these reasons, we’re bullish both in the near term and over the long term.

Commentaries contained herein are provided as a general source of information based on information available as of December 7, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

Publication date: December 12, 2018

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