Emerging markets (EMs) were on a rough patch in 2019, with both Argentina and Iran remaining in recession and slowdown visible across Brazil, India, Mexico, Russia, Saudi Arabia and Turkey. The nearly 2-year long trade war between the United States and China also impacted the emerging markets. The series of tariff hikes dampened trade and hit hard the export-driven emerging economies.
Along with that, slowdown in China’s economy also spilled over into other developing nations, driving investors away from these markets. Evidently, the iShares MSCI Emerging Markets ETF (EEM) rose 14.6% last year, less than the S&P 500 Index’s rise of 29.8%. However, 2020 looks a lot more promising for the emerging markets; here’s why -
2020 Emerging Market Outlook
There is no assurance that the global economy will rebound this year, but Argentina and Iran are expected to emerge from recession. The World Bank expects a slight decline in growth throughout the United States, Europe and Japan. Collectively, such countries are expected to grow 1.4% this year compared to 1.6% growth in 2019. Much of this is due to the softness in the manufacturing sector and the effect of U.S. tariffs and retaliatory measures. However, developing countries are expected to grow at a 4.3% pace in 2020 compared to the 4.1% in 2019.
Per a Bloomberg survey of 57 global investors, strategists and traders, emerging markets’ assets are expected to outperform their developed peers this year. Moreover, the survey claims that Asia has the best prospects among the rest.
Theory states that emerging markets perform better during the global business cycle’s expansion phase, hence, equities will definitely benefit from the upturn in the global business cycle. Total wealth (stocks and bonds together) of EMs at present exceeds $27 trillion, which is more than the combined wealth of the United States and Germany.
But, which emerging countries will gain the most?
Slowdown in the economy along with softness across the manufacturing space had dampened China’s growth. However, the iShares MSCI China ETF (MCHI) with holdings from 597 securities grew 22.5% in 2019, thanks to Alibaba and Tencent, which make up nearly 30% of the portfolio. And with the Chinese administration consistently “injecting a lot of liquidity into the system” and easing of the U.S.-China trade war lowering the tariffs, China seems to have brighter growth prospects this year.
An underperformer in 2019, South Korea may rebound this year. The U.S.-China trade war played a massive role in dampening the economy. Moreover, the semiconductor dominant country went into a downturn in 2017 and did not recover in the last two years. However, Samsung Electronics Co., Ltd.’s (SSNLF - Free Report) stock has climbed nearly 30% keeping investors hooked to this emerging market.
Russia was the super performer among the EMs in 2019, the MOEX Russia Index rose 28.5%, quite close to the S&P 500 index. In fact, the iShares MSCI Russia Capped ETF (ERUS) rose 35.8% last year, surpassing the most successful global indexes like the S&P 500 and Nasdaq. The country is expected to continue the momentum in growth and emerge as a fairly valued and popular market.
Moreover, this year EMs will be a brighter spot for investors as their high growth prospects and rapid pace of industrialization provides higher opportunities of earning significantly higher return. As long as central banks across the globe keep monetary policies relaxed taking inspiration from the Federal Reserve, EM’s will perform better. Additionally, the three consecutive rate cuts by Fed lowered the rate of dollar. This in turn helped these EMs that export commodities to perform better as they make the most of the low-dollar environment.
5 Stocks that Can Make the Most of EM’s Growth in 2020
As the U.S.-China trade tiff eases and both countries sit for further resolution, and Fed and other central banks keep rates unchanged and offer liquidity, shares of EM’s will surely see a northward movement. In fact, per IMF projections, emerging market and developing economies will experience growth of 4.6% in 2020 compared to the growth in the advanced economies of 1.7%.
Moreover, emerging markets have attractive valuations and their economies grow at a faster pace, which works perfectly in investors’ favor.Thus, we have selected five solid stocks from the emerging markets that are poised to grow and flaunt a Zacks Rank #1 (Strong Sell) or 2 (Buy).
China Automotive Systems, Inc. (CAAS - Free Report) manufactures and sells automotive systems and components in China. The company’s expected earnings growth rate for the current year is more than 100% against the Zacks Automotive - Original Equipment industry’s projected earnings decline of 16.5%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 87.5% upward over the past 60 days. China Automotive Systems flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
JD.com, Inc. (JD - Free Report) is an e-commerce company and retail infrastructure service provider in China. The company’s expected earnings growth rate for the current year is more than 100% against the Zacks Internet - Commerce industry’s projected earnings decline of 0.6%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 11.6% upward over the past 60 days. JD.com flaunts a Zacks Rank #1.
QIWI plc (QIWI - Free Report) is an operator of electronic online payment systems. The company’s expected earnings growth rate for the current year is 72.9% compared with the Zacks Financial Transaction Services industry’s projected earnings growth of 9.2%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 5.7% upward over the past 60 days. QIWI carries a Zacks Rank #2.
Samsung Electronics is a South Korean multinational conglomerate. The company’s expected earnings growth rate for the next year is 43.1% compared with the Zacks Electronics - Miscellaneous Products industry’s projected earnings growth of 22.1%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 2.6% upward over the past 90 days. Samsung holds a Zacks Rank #2.
Mobile TeleSystems PJSC (MBT - Free Report) provides telecommunication services primarily in Russia, Ukraine and Armenia. The company’s expected earnings growth rate for the current year is 2.9% against the Zacks Wireless Non-US industry’s projected earnings decline of 0.9%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 2.9% upward over the past 60 days. Mobile TeleSystems carries a Zacks Rank #2.
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