PMC Weekly Review - April 15, 2016
A Macro View – Guess Who’s Back? EM’s Back
Emerging markets (EM), one of the most unloved asset classes of the past few years, have recently proven to be a bright star in the market. As global equities posted another strong week (hitting fresh year-to-date highs across a number of markets), EM continued to strengthen. Its success thus far in 2016 raises a question on an asset class that has struggled for most of the past five years: Is EM finally back?
The EM asset class posted a great first quarter, gaining 5.7%, as measured by the MSCI Emerging Markets Index. Several EM markets did exceptionally well, with the MSCI Latin America and MSCI EM Eastern Europe indices posting advances of +19.1% and +15.0%, respectively. Higher commodity prices, combined with an improving investor risk appetite and dovish global central banks, as well as a weakening dollar, helped to fuel much of the rally. EM’s success this year has been a great trend reversal of losses in the past three calendar years, including a -14.9% decline in 2015.
Its struggles have also negatively affected well-diversified portfolios, which have experienced a rally driven predominantly by US large cap over the past three years. Although we have definitely seen weak years recently for EM, it is important to remember that it can often lead by very wide margins. Over the 10-year decade from 2000-2009, in which the S&P 500 posted a loss of 9.1%, the MSCI Emerging Markets Index gained 154%, easily outpacing most major asset classes.
Despite its struggles of the past few years, strong reasons support owning EM, many of which investors have ignored. From a valuation perspective, MSCI Emerging Markets are trading at a forward P/E of 11.9, compared with 15.6 for the MSCI ACWI Index, and 17 for the S&P 500 Index, and also at a lower relative value from historical levels. From a diversification standpoint, owning EM helps portfolios gain access to countries that are experiencing growth at different times in their economic cycles, and often at higher rates, than the U.S.
Much of the negativity surrounding EM in 2015 was the Federal Reserve’s (Fed) looming rate hikes and the potential negative impact they would have on developing countries. Heading into 2016, the Fed was expected to raise rates four times this year. However, weaker-than-expected global economic data and indications from the Federal Open Market Committee (FOMC) suggest that we are still a ways off from the Fed’s moving aggressively to raise rates.
For the time being, Envestnet | PMC believes EM is definitely back. Whether the trend continues for investors buying into the story of a recently unloved asset class, or we see another reversal out of EM, only time will tell. One thing is certain: EM has posted outstanding gains in the past, often when other asset classes are struggling, and its success may mark the return of diversification.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2016 Envestnet. All rights reserved.