Emerging markets have had a pretty rough year, but next year could be completely different. A rising interest rate environment and trade conflict between the United States and China compelled investors to dump emerging market stocks.
However, a possible slowdown in U.S. central bank’s policy tightening path, a possible U.S.-China trade truce and significantly low levels of current valuations could easily propel emerging market stocks in the New Year, which certainly calls for investing in these shares.
Fed Policy Tightening to Slow Down
The Fed has hiked rates four times this year, exerting pressure on emerging markets. The iShares MSCI Emerging Markets exchange-traded fund (EEM) is currently down 20% from its 52-week high. EEM, thus, is not only trading in the bear market territory but is also on the brink of registering its first yearly decline since 2015. Individual ETFs tracking Brazilian, Mexican, Russian, Chinese, Indian and South Korean stocks are also down more than 8% so far this year.
But, the Fed now is widely expected to slow down its policy tightening path. In fact, the CME Group’s FedWatch tool shows that the central bank may not hike rates at all next year. Chief investment officer at Guggenheim recently added that there is a 50% chance the Fed may even turn around and trim interest rates.
Such a slowdown in Fed tightening policy or even a reversal in policy will surely boost emerging market stocks. A loose monetary policy leads to lower rates and eventually a weaker dollar. This in turn helps improve emerging market exports to the United States.
Upbeat News for Global Trade
The United States and China, in the meantime, have slapped a slew of tariffs on billions of dollars of each other’s commodities. The United States has for quite some time complained that China has not opened its economy as much as it has and has also charged China of intellectual-property theft.
Such tit-for-tat tariffs on each other’s imports unnerved investors as it increases the threat of widespread recession and eventually lower corporate profits. In fact, such conflicts have an overwhelming impact on especially emerging markets as tighter trade situations affect export-driven economies.
But, things are currently looking up with both sides willing to resolve the issue. The Trump administration is ready to send a delegation to hold talks with their Chinese counterparts during the week of Jan 7, per Bloomberg News. Larry Benedict, CEO of The Opportunistic Trader platform chipped in and said that “emerging markets — particularly China — could get a major boost if both sides resolve this issue.” He added that “at some point, we’re going to have to do some sort of permanent trade deal with them. If that happens, I think China can outperform the U.S. It’s the same thing with the EEM. I think there is some opportunity there.”
EM Valuations Most Attractive in 3 Years
Thanks to the beating the emerging market stocks took this year, they now have far more attractive valuations compared to the developed economies. This year’s plunge pushed EEM’s price-to-earnings ratio (P/E) down to 11.41, its lowest since February 2016.
Emerging market stocks, thus, won’t burn a hole in your pocket. And even if the emerging markets face volatility next year, it shouldn’t bother investors much as they will be buying emerging market stocks at a cheaper price compared to last year.
5 Solid Buys
Taking the above-mentioned factors into consideration, we thus selected five emerging market stocks that flaunt a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Mobile TeleSystems (MBT - Free Report) provides telecommunication services. The company was founded in 1993 and is headquartered in Moscow, Russia. The company’s shares have tanked 31.3% so far this year but are forecast to gain a whopping 67.6% next year.
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander (BSMX - Free Report) provides various banking products and services in Mexico. The company’s shares have fallen 17.9% on a year-to-date basis but are expected to gain a steady 10.5% and 8% next quarter and year, respectively.
HDFC Bank Limited (HDB - Free Report) provides a range of banking and financial services to individuals and businesses. HDFC Bank Limited was founded in 1994 and is based in Mumbai, India. The company’s shares have gained a meagre 0.6% so far this year but are likely to rally 17.1% and 25.2% next quarter and year, respectively.
OneSmart International Education Group Limited (ONE - Free Report) provides tutoring services for kindergarten and primary, middle, and high schools in the People's Republic of China. The company’s shares have tanked 29.5% so far this year but are forecast to gain a solid 19.4% next year.
China Life Insurance Company Limited (LFC - Free Report) operates as a life insurance company in the People's Republic of China. The company’s shares have slipped 33.4% on a year-to-date basis but are projected to gain a superb 22.9% next year.
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