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Emerging Markets An Opportunity for Active Managers

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Broadly speaking, emerging markets equities are flailing again this year, but emerging markets equities could be back in vogue if there’s regime change here in the U.S. come November and that could be an opportunity for active managers to strut their stuff with this asset class.

Morgan Stanley strategists are looking at developing economies “noting that polls showing a wider lead for Democrats could mean less risk of a drawn-out contesting of results that should help emerging market assets perform well in the near-term. Another U.S. fiscal stimulus package would also help emerging market stocks and bonds, the strategists write,” reports Reshma Kapadia for Barron’s.

A victory by former Vice President Joe Biden on Election Day could lift emerging markets assets because it’s expected his tone toward China – the largest developing economy – will be far less bellicose than President Trump’s has been.

Examining Emerging Markets

Emerging markets investors are once again back as world economies begin the recovery process from Covid-19, but they’re not simply throwing darts at a board. EM investors are exercising more due diligence and thus, are more picky with their investments.

“Investors have returned to emerging markets after the coronavirus shock, helping to encourage a surge in government debt issuance,” a Financial Times report said. “But that revival in confidence has its limits. While some governments will continue to fund themselves with ease, others are finding it more difficult, raising questions about debt sustainability down the line. The overall bounceback from the panic selling that gripped markets in March has been impressive.”

Emerging markets can continue to enjoy a recovery if a tailwind of factors can keep blowing in its favor. This should give EM exchange-traded fund (ETF) investors something to cheer about whether they’re focused on equities or bonds.

One thing to think about before EM investors decide to jump in is the uneven recovery. While China is leading the way after rebounding from the effects of Covid-19, some countries are left in the rearview mirror. That speaks to the advantages of active management because active managers don’t have to adhere to the geographic constraints set forth by a passive index,

While the EM space has seen better days, historically the group has the ability to outperform given its history versus developed markets. Looking at the chart below, the Stock News article cited the underperformance during the past 12 years, but also its outperformance in previous time periods–namely 1988-1993 and 1999-2007.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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