Don’t Put a Nail in the Emerging Market Coffin Just Yet
I wouldn’t say the nail is in the emerging market coffin quite yet. During the financial crisis, the EMSCI Emerging Market Index was left for dead (down 50 percent in 2008) before resurrection in 2009 and 2010 (up 74 percent and 16 percent, respectively). For the last two years, however, the EMSCI index has underperformed the S&P 500 Index massively, by more than -30 percent. Included in this international index are holdings from China, Russia, India, Brazil, South Korea, and South Africa, among others.
The question now becomes can the emerging markets resurrect themselves from the dead again? Recent signs are flashing “yes.” Over the last three months, emerging markets have outperformed the S&P 500 by more than 8 percent, but these stocks still have a lot of ground to make up before reaching the peak levels of 2007. Last year’s slowing growth in China and a European recession, coupled with talks of the Federal Reserve’s “tapering” of monetary stimulus, didn’t provide the EMSCI index any help over the last few years.
With all the distracting drama currently taking place in Washington, D.C., it’s a relief to see some other indications of improvement. For starters, China’s most recent PMI manufacturing index results showed continued improvement, reaching a level of 51.1 – up from August and signaling a reversal from contraction earlier this year (levels above 50 point to expansion). Chinese government leaders are continuing their migration from an externally export-driven economy to an internally consumer-driven economy. Despite the shift, China is still targeting a respectable 7.5 percent GDP economic growth target, albeit a slower level than achieved in the past.