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By Patricia Ribeiro - October 29, 2018
It's no secret that emerging market (EM) companies were battered in recent months—and 2018 hasn't been kind to them generally. But I'll say this: many emerging market stocks have been hit unfairly, as they got swept up in the fear of an EM contagion that never materialized.
Furthermore, the market is just not recognizing—or rewarding—those companies with strong and/or encouraging fundamentals. A big part of the recent EM downturn is attributable to fears associated with real issues with three countries: Turkey, Argentina and China.
Many people have asked me in recent weeks whether emerging market stocks have hit a bottom, and here's how I've answered: if they haven't, I think they're close.
In my most recent video, I explain why I'm still encouraged by the opportunities in emerging markets, and how we scrutinize our portfolio when the waters get rough.
What we saw in the third quarter of 2018 is that the markets were not rewarding fundamentals. The markets were very driven by news headlines as well as by political events that were going on. Turkey was a big challenge with worries of contagions across emerging markets. So that created some challenges for the emerging markets in general.
The other one that continues to be an issue is the potential trade wars between China and the U.S. It is still not clear how that is going to really be settled. So that continues to challenge the emerging space. The assumption is that China is going to be slowing down quite a bit, and that's going to impact all the countries across emerging markets.
There are some that think emerging markets bottomed in the third quarter. What we see is that the fundamentals in emerging markets continue to be very strong, and they have not been rewarded. Valuation, the gap between the developed market valuations and emerging markets, are actually pretty large.
These stocks in emerging markets are actually very attractive. Valuation is even more attractive than what they were back in 2017. And the drivers of growth for the stocks from a bottom-up, they are still there. We continue to see those drivers.
If we're not at the bottom, I would say we're pretty close to the bottom in terms of when we are going to see a turnaround in emerging markets.
When we saw what happened in the third quarter, where markets were driven by news and also political situations—not really focused on fundamentals—what we do in those cases is we go back to the portfolio. We go back to every name in the portfolio, and we'll revisit the investment thesis that we have for each stock. Then we put that stock, in the current context, in terms of the macro environment where that company is operating to see if anything has changed. Has anything changed in investment thesis, or the risks associated with that investment thesis?
If nothing has changed and if we continue to see the inflection point, the earnings acceleration and we have a strong visibility that the company can deliver on their earnings acceleration, then we continue to hold the names. So what we have done in the third quarter hasn't really been significant changes in the portfolio because the names that we hold are still delivering. And I've said this before—emerging markets are 24 countries, and they don't really function the same. They are all at different stages of their economic cycle. Also, politically they are different. What we saw in 2018, and we continue to see actually, is that there are elections. There has been elections in some countries, and in others, there's still elections to happen this year. So that has also created some uncertainty around who is going to be coming, what kind of policies we're going to see in emerging markets.
So all of that has created this more unstable ... there's some sort of instability or maybe some lack of visibility in emerging markets. But what we see is that the fundamentals are still very strong in emerging markets. We see that the demand and the consumer in emerging markets is still there, and it's still strong. It continues to really participate much more actively in the economies of all these countries across emerging markets.
Emerging markets face a tough year ahead with the status of the U.S.-China trade war and the U.S. presidential election still up in the air.
First Quarter 2020
In this quarterly update, Portfolio Manager Margé Karner discusses the good and the bad of emerging markets debt heading into the new year.
January 25, 2019
Trade war aside, Sr. Portfolio Manager Patricia Ribeiro is still finding opportunities to invest in China. Find out how in her latest quarterly update.
October 2019
2018 hasn't been kind to emerging markets. Sr. Portfolio Manager Patricia Ribeiro believes fears of contagion, which never materialized, caused the recent volatility. Read why she's still encouraged by opportunities.
October 29, 2018
2018 may have been difficult for emerging markets, but Sr. Portfolio Manager Patricia Ribeiro has three reasons to look forward to a better 2019.
January 8, 2019
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Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.