Get Ready For The Emerging Markets Era In Stocks

Get Ready For The Emerging Markets Era In Stocks
Russell Burns

about 1 year ago4 mins

  • The investment of the next decade will be emerging market stocks, says Morgan Stanley Investment Management. That’s why the fund manager is selling off some US stocks and loading up on emerging market ones.

  • It’s not just Morgan Stanley’s wealth management unit that’s got its eye on emerging market assets. Global indexes and ETF flows so far this year show a similar trend playing out.

  • India looks like a particularly strong investment destination, helped by its favorable demographics, lower debt levels, and increasing allure as an international production hub.

The investment of the next decade will be emerging market stocks, says Morgan Stanley Investment Management. That’s why the fund manager is selling off some US stocks and loading up on emerging market ones.

It’s not just Morgan Stanley’s wealth management unit that’s got its eye on emerging market assets. Global indexes and ETF flows so far this year show a similar trend playing out.

India looks like a particularly strong investment destination, helped by its favorable demographics, lower debt levels, and increasing allure as an international production hub.

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Emerging markets are going to be the stock stars of the next decade, according to Morgan Stanley Investment Management. That’s why, the fund manager says, it’s taking money out of expensive US stocks and investing it in ones from developing economies, particularly India. Let’s take a look at why this wealth giant is becoming so starstruck by emerging market assets, and whether you should be too.

What’s the view?

Morgan Stanley IM, which has a huge $1.3 trillion in assets under management, believes there’s a new leader in the market every ten years or so. And for the past decade, that’s been US stocks and mega-cap tech, as an era of ultra-low interest rates boosted growth and technology stocks, where the US leads the world, to heady valuations.

In the coming decade, the fund manager says, the growth outlook, cheaper valuations, and favorable demographics all point to an extended period of outperformance in emerging market and international stocks.

And while Chinese stocks currently represent a considerable 30% of the MSCI emerging markets index, Morgan Stanley IM says it probably won’t be an outsized driver of its growth in the years to come. That’s because China’s economy faces the challenges of a declining population, a massive debt burden in certain sectors – think: property – and a diminishing prominence in global supply chains. For those reasons, the fund manager is betting big on India, which has a lower debt burden and a still-growing population, and on Thailand, Vietnam, Mexico, and Indonesia, which could benefit from those supply chain changes.

How are things shaking out so far?

Now, Morgan Stanley IM says it’s in for the long haul, but the fact is, it’s already seeing some gains on this bet. And that’s because the US dollar, which had strengthened against almost every other currency last year, has been broadly weakening against them lately.

For US-based investors, exposure to non-US assets looks much more attractive when the US dollar is weakening. And for emerging countries and companies, their outlook overall improves when the US dollar weakens. That’s because they can issue debt in US dollars – which allows them to invest more for growth and pay back what’s owed with future, cheaper US dollars.

And it’s not just Morgan Stanley IM that’s got its eye on emerging market assets. Global indexes and ETF flows so far this year show a similar trend playing out.

ETF data shows the biggest outflows (redemptions) out of US stock ETFs, with Invesco QQQ Trust Series 1 (ticker: QQQ; expense ratio: 0.2%), iShares Russell 2000 ETF (IWM; 0.19%), iShares Russell 1000 Growth (IWF; 0.18%) seeing the biggest outflows.

ETF redemptions from January 1st to 24th. Sources: ETF.com and Factset.
ETF redemptions from January 1st to 24th. Sources: ETF.com and Factset.

Meanwhile, the iShares Core MSCI Emerging Markets ETF (IEM; 0.09%) has seen the biggest inflows of any stocks ETF, edging out the JPMorgan Betabuilders Europe ETF (BBEU, 0.09%).

ETF creation data from January 1st to 24th. Sources: ETF.com and Factset
ETF creation data from January 1st to 24th. Sources: ETF.com and Factset

And across stock markets, indexes in emerging markets have performed best this year so far, along with those in Europe, where a milder-than-expected winter has eased worries about potential energy shortages and factory shutdowns.

ETF moves from January 1st to 26th. Source: Bloomberg.
ETF moves from January 1st to 26th. Source: Bloomberg.

What’s the opportunity then?

The iShares Core MSCI Emerging Markets ETF provides broad exposure to emerging markets. Its investment breakdown by country is: 28% China, 14% India, 14% Taiwan, 12% South Korea, and 5% Brazil. However, if you would like to consider more focused investments, in line with the fund manager’s thoughts, then you could also consider the following:

India. With its massive (and growing) population, its median age of 28 (compared to China’s 38), and its stocks’ strong growth potential over the longer term reflected in their 19x price-to-earnings multiple, there’s a lot to like about investing in India. Jon wrote more about India here. Last year, India had one of the best-performing stock markets, but this year it’s off to a sluggish start. However, the long-term growth opportunity for India remains intact, so an asset like the iShares MSCI India ETF (INDA; 0.68%) may prove to be a smart and timely contrarian investment.

Thailand and Vietnam. China’s reopening is a huge boost for tourism for both Thailand and Vietnam. Goldman Sachs estimates that China tourism back in 2019 contributed 3% to Thailand's economy and over 1% to Vietnam’s. What’s more, Goldman estimates that about 6% of the economic output of both countries is dependent on Chinese domestic consumption. To bet on Thailand and Vietnam having a good year, you could consider buying the iShares Thailand ETF (THD; 0.58%) or the VanEck Vietnam ETF (VNM; 0.59%), if you are happier to buy assets at the riskier end of the investment spectrum.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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