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By Patricia Ribeiro - April 25, 2019
The suddenly dovish stance from the U.S. Federal Reserve has been good news for emerging markets—both in terms of equities and currency values—as we head into the second quarter and the rest of 2019.
As a result, we saw more money flowing into emerging markets in Q1. I think there are two reasons for that: first, valuations have once again become attractive and investors are focused on the fundamentals. And second, the Fed's decision to keep rates steady calmed worries that emerging markets would pay dearly in a rising rate environment.
But not everything in the emerging markets picture is perfect. There's still no truce in the U.S.-China trade war, which has a trickle-down effect through other markets, both emerging and developed. Admittedly, there's a lot of optimism that we'll see a signed agreement between the two countries soon, but I didn't think it would take this long. So, we'll all stay tuned with our fingers crossed.
Please click on my latest quarterly video to hear more of my thoughts on these topics, as well as which country I'm particularly bullish on. (It might surprise you.)
After a difficult year in 2018, what we're seeing so far in 2019 is that markets are starting to focus on fundamentals again and really looking forward to earnings opportunities or earnings growth for 2019 and beyond.
The fact that the Federal Reserve is signaling us that there are no more rate hikes coming in 2019, sort of a much more dovish statement coming from the Fed, is actually very positive for emerging markets. I think that all this drives markets, or emerging markets, to do well when that's the expectation from the Fed. Also, it helps with currencies, and so the expectation for FX (foreign exchange) in emerging markets, in terms of appreciation or depreciation of those currencies, what is now looking like is that, what looks like now is that currencies are actually, if anything, appreciating going forward—if not stable. The stabilization of currencies in emerging markets is also a very positive signal for the market as a whole.
We had a much better first quarter of 2019. What we saw in the markets in 2019 so far was January was a month where we saw money going back into emerging markets, driven by two things. One was valuation, very attractive in emerging markets. And then also the Fed, sort of the expectation of the big slow down in terms of rates. So, money went into emerging markets looking for very cheap stocks, you know, really focusing much more on that valuation driver.
February and March, it's shifting a bit, and it's looking a lot better and fitting much better with what we do because now what we're seeing is the market is looking much more in terms of fundamentals. What the companies are reporting in terms of the end of last year, but more important, what are companies talking about as far as what they are seeing for the year 2019. So, expectations for earnings coming down, or adjustment downwards in earnings I think are out of market at this point. It seems they have reached a bottom.
Obviously, the issue with China and the U.S.—it looks like it has come to an end. It looks like, but nothing has been signed yet. So, I think that the risk perception that we saw last year is out of the way. But we need to see obviously that come to an end completely, hopefully sooner than later. It has lasted longer than I expected; I didn't expect it to last as long as it did. But also what we have seen with that is that the Chinese have been very proactive in coming with measures to stimulate and manage sort of the fallout or the deceleration in their economy.
I always say that we can't think of emerging markets as one big group of countries that move together, and that continues to be the case. That's where there are always opportunities in emerging markets because they are all at different times in that earnings cycle.
What we're seeing more recently, where we're finding more opportunities for us as we look into 2019 and 2020 has actually been China again. So, we're bullish on China. We think that the market has reached a bottom and there's some data that the Chinese government's been putting out more recently—economic data—that is showing that there is some, starting to see some improvement in that economy.
In 2019, we are seeing emerging markets investors focusing more on the bottom up—for stocks that will outperform—and less on just headline news.
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