Where On Earth To Find The Best Value in 2021

Where On Earth To Find The Best Value in 2021
Milou Beunk

about 3 years ago3 mins

Mentioned in story

What’s going on here?

As one of the most widely shared investment ideas for 2021, it’s no surprise that emerging -market (EM) stocks have surged recently – with one major index beating the US stock market by 10% already since our December Insight on the subject. According to a number of professional investors, however, there are still some bargains to be had out there so long as you’re selective…

What does this mean?

With US stocks continually hitting fresh record highs since November, it’s unsurprising investors have been increasingly interested in ideas outside the States. And the case for investing in EM stocks in 2021 has been persuasive.

For one, EM stocks are known to be highly “cyclical”: their fortunes are closely aligned with global economic growth, to a greater extent than developed-market (DM) equivalents. The shot in the arm vaccine rollouts are expected to give the world economy this year should, therefore, give EM stocks a big boost too.

What’s more, EM stocks are poised to benefit from the declining international value of the US dollar, likely to continue as US interest rates stay low and the global economy recovers, both of which hamper demand for US bonds and in turn the US dollar. As both EMs’ exports (think commodities) and their government bonds are typically priced in dollars, the former become more attractive to overseas buyers and the latter more affordable for the countries themselves – supporting local company growth.

The slight hiccup is that big institutional investors have been cottoning on to EM stocks’ charms recently. The key MSCI Emerging Markets Index, which covers 27 countries, has hit record highs after rising 80% from its pandemic low, and supposedly “cheap” EMs are now catching up to DMs in terms of price-to-earnings (P/E) multiples. As the chart below shows, this valuation gap is approaching its narrowest since just before the pandemic.

Valuation of DM stocks vs EM stocks
Source: Goldman Sachs

Yet despite their increasing popularity and prices, last week saw analysts from banks Goldman Sachs, UBS, and Wells Fargo all stating the belief that EM stocks have further to rise – with Goldman drawing attention to one potential short-term catalyst in particular.

In 2019 and 2020, investors significantly reduced their exposure to EM stocks – and even with the recent revival of interest, investor purchases of EM stocks are only halfway back to recent norms. If investor demand fully returns to previous levels, then EM stocks may have 12% further to rise.

EM index performance vs investor flows
Source: Goldman Sachs

Why should I care?

EM stocks could make a great long-term addition to your portfolio: they offer exposure to higher growth opportunities as well as diversification benefits, since EM stocks don’t always move in sync with DM equivalents. But that heightened economic sensitivity also makes them riskier propositions – and the potential payoff may no longer be sufficiently attractive to justify EM stocks in general. Goldman’s best-case scenario projects an 8% increase for the MSCI index over the next year: higher than the 5% to 6% forecast for Europe, Asia, and Japan, but below US stocks’ 14%.

A better idea might involve being more selective about which emerging markets you invest in. Goldman, for its part, highlights Poland, Mexico, and India as its top picks – not least due to the continued cheapness of their stocks.

Average company earnings expectations for Mexico and India remain 20% below where they were a year ago, providing more scope for recovery. Mexico’s stock market, meanwhile, is one of the few in the world where P/E multiples are lower than their average over the past decade. And Poland and India are particularly strong in terms of diversification, with local stocks relatively more exposed to local demand (which could be boosted by economic growth) than overseas interest.

So EM stocks don’t look unattractive overall – but digging a bit deeper and investigating investments in individual markets (via their corresponding exchange-traded funds) could be your best bet in 2021.



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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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