What’s Going On Here?A key emerging market (EM) stock index has slid almost 10% since its mid-February high, as investors start to realize there’s no place quite like home. What Does This Mean?Investors seem to have been spooked by the surge in coronavirus infections in countries like India and Brazil, as well as the ever-present threat of inflation. Just the prospect that the US Federal Reserve will raise interest rates, after all, is steering investors away from stocks and toward safer bets like new government bonds.
That’s not EMs’ only interest rate-based concern either. The move would likely encourage investors to put more of their money into higher-yielding US assets, which would push up the value of the US dollar. And when the dollar’s strong, both EMs’ dollar-denominated exports and their borrowing in the currency becomes more expensive, hurting their economies and company earnings alike. Why Should I Care?For you personally: EM stocks aren’t a monolith.
Still, JPMorgan and State Street think there are EM opportunities out there. They reckon you should look at the places – namely Mexico and Taiwan – that have strong trade links to the US and could therefore benefit from the country’s economic recovery. You might also want to look at big exporters of raw materials, whose prices are rising as countries look to rebuild their economies. That, the money managers say, could be good news for South Africa and – oh, hello again, Mexico.
Zooming out: ESG is the future.
Major investors are increasingly focused on meeting environmental, social, and governance (ESG) targets, and they’ve turned to EM stocks to help them do it. Some argue EM companies are less likely to exaggerate their eco-credentials than their developed peers: they’re not obliged to disclose ESG metrics, so there’s not exactly any pressure to pretend they’re more virtuous than they are. | 