Not many people are talking about emerging markets (EM) lately but that may be about to change. For a long time, countries considered to be “emerging” were heavily tied to the commodity cycle and inflation. Examples included China and Brazil. This was the case in the mid 2000’s when emerging markets and commodities experienced explosive growth. Since then, much has changed. These countries are no longer dominated by large state-owned oil companies and banks. Hence, their ties to the commodity cycle have loosened dramatically, especially in Asia. As Barron’s reported recently, “emerging markets are rife with internet and health-care companies that are early in their growth trajectories.” They also mentioned how EM stocks trade at 15.5 times forward earnings versus 22 times for US stocks (i.e. the S&P 500). In other words, they are relatively cheap!
As you may already know, EM has underperformed the US markets for the last decade. This trend is likely to revert at some point. The backdrop for EM looks good as China was the only major economy to expand this year and other Asian markets like Taiwan, Korea and Hong Kong are performing very well. Over the past few years, we have added incrementally to EM equities in our portfolios and recently added an EM bond component. In a world where a ten-year treasury bond yields 0.8%, we think EM bonds yielding 6% are worth a look.