The US markets have provided plenty of excitement this year to keep investors on their toes. But as poorly as US and European stocks have performed since early 2022, emerging market stocks have done worse.
But as the US dollar retreated from its multi-decade highs last month, investors including Allianz’s Mohammad El-Erian noted that valuations in emerging markets have reached “historically cheap” levels
Asked about his outlook for emerging markets, Mark Mobius, a pioneer investor who helped build Franklin Templeton’s emerging markets business before launching Mobius Capital Partners, argued that while the overall tone has been “generally negative “This year, there are still plenty of opportunities to be found in the emerging market space.
‘We are finding good companies in all regions’
To be sure, underperforming emerging market equities is nothing new.
MSCI Emerging Markets Index 891800,
a gauge that includes shares of companies from more than 20 of the world’s largest markets in Asia, Latin America and Africa, is down 18.4% compared to the S&P 500’s 13.4% SPX,
Year to date. Over the past 10 years, the MSCI Emerging Markets Index has returned just 36.9% in US dollar terms, while the S&P 500 has returned 264.5%, according to FactSet data.
Within the index, performance has varied widely and past performance does not determine future returns. When asked about his outlook for each region, Mobius said it would be “impossible to generalize” but that he sees “opportunities” to invest around the world.
“We are finding good companies in all regions,” Mobius said during an email exchange with MarketWatch.
When it comes to individual countries, Mobius said he favors India among major emerging market players and sees opportunities in Kenya and South Africa among smaller emerging and frontier markets.
Any investor looking to invest in the EM space needs to be aware of some important prerequisites.
“The key is the exchange situation and the country’s capacity to pay its debts and our capacity to obtain [U.S. dollars] outside the country when we want to liquidate holdings,” Mobius said.
At the company level, Mobius looks for companies with strong pricing power and “little or no debt.”
Since the beginning of the year, the financial crisis in Sri Lanka has stoked fears that other frontier markets will experience something similar, as the strong dollar and high commodity prices weigh on the finances of countries that primarily import raw materials. like oil.
While there are some exceptions: the currencies of energy producers Mexico USDMXN,
and Brazil USDBRL,
have held up remarkably well: the dollar is up more than 6% against the Indian rupee USDINR,
and Chinese yuan USDCNY,
Investing in emerging market stocks likely means investing in Asia, which is home to by far the largest share of publicly traded companies represented in the MSCI index.
Taiwan Semiconductor Manufacturing Co. 2330,
the semiconductor giant that is a critical link in the global technology supply chain, has the largest weight of any company in that index.
Outside of Asia, Brazil has the largest weighting, with Brazilian companies accounting for more than 5% of the index’s market capitalization. One reason for this uneven representation is that Latin American economies have more of a “fixed-income culture,” making them more represented in emerging-market bond indices and less so in equity indicators, according to Dirk Willer, director Emerging Markets Strategy Manager at Citigroup.
Chinese stocks have performed particularly poorly over the past year as investors dumped the country’s high-flying tech shares amid a Communist Party crackdown on the industry.
KraneShares CSI China Internet ETF KWEB,
it is down more than 23% so far this year as investors fear the riots in China’s property market could metastasize into a broader financial contagion.
While he expects Chinese tech stocks to rebound soon, Mobius said foreign investors should approach Chinese stocks with caution.
“There will be some recovery in those tech names, but the general tone of the market is not good in light of the disastrous real estate market,” Mobius said.
With House Speaker Nancy Pelosi’s recent trip to Taiwan dominating the headlines this week, is Mobius worried about the added strain it could put on the bilateral relationship?
“The impact [of Pelosi’s visit to Taiwan] tension between the US and China will steadily increase on all fronts: trade, investment, education, etc. There is increasing competition in all areas, with technology and weaponry being the most prominent,” Mobius said.
US stocks haven’t bottomed out yet
Switching to a discussion of US stocks, Mobius said he still believes there will be more pain for investors, even as stocks rallied in July.
“We will likely get another leg down as the Fed continues to hike rates,” he wrote. “I expect rates to go much higher and that means a number of companies are going to be in trouble and glamorous tech stocks with no earnings and relying on more and more cash inflows are going to be in trouble.”
Mobius added that he won’t feel comfortable calling bottom until he sees a “complete surrender.”
“Of course, we must realize that we are already in a bear market, but the end game requires a total surrender on the part of investors. Currently, there is a lot of hope.”
US stocks rallied on Wednesday after consecutive losses. The Dow Jones Industrial Average DJIA,
was on track to recoup its 400-point loss from the previous day, while the S&P 500 and Nasdaq Composite COMP,
both were on the way to strong profits.