Why All Investors Should Pay Attention to Emerging Markets

Last update on: Nov 22 2019

U.S. investors should pay attention to what’s happening in emerging markets, even if they’re not invested in those markets.

Emerging markets had strong recoveries after a bear market ended in early 2016. Latin American markets were among the strongest, with equity returns outpacing U.S. stocks for most of 2016 and 2017. But the situation began changing in late 2017, and the changes accelerated in 2018.

Emerging market stocks peaked in late January and since then have declined more than 20%. That’s what most investors consider a bear market. Of course, stock indexes in some countries have declined more than 20%.

While this is far from the deepest bear market in emerging equities, there are a couple of characteristics to note. This is the third-longest bear market in emerging market stocks in the last 30 years, according to Bespoke Investment Group. This also is the longest period the stocks have gone without at least a 10% rally.

Even after this decline, emerging market assets aren’t particularly cheap by most measures. Many valuation measures are near long-term averages or even above them.

The emerging market fundamentals also aren’t positive. While a few countries, such as Turkey and Argentina, grab most of the headlines, the emerging market difficulties are more widespread.

Emerging markets often respond negatively when the Federal Reserve increases interest rates and react before U.S. markets do. That’s certainly happened this time.

Higher interest rates in the United States have created several problems in emerging economies. The increase in U.S. rates caused the dollar to appreciate against emerging country currencies. That created problems for emerging economy borrowers who took out debt denominated in dollars.

The stronger U.S. economy and higher interest rates cause global investors to shift money from emerging markets to the United States. That creates additional downward pressure on the emerging markets.

Trade conflicts with the United States also are a problem, especially the conflicts between the United States and China. The Chinese stock market and currency already have depreciated a lot, and those trends are likely to continue until the conflicts are resolved.

Economic growth in China also has slowed, and China is dealing with several economic issues. Problems in China are likely to spread to other emerging market economies.

Elections in some countries, especially Brazil, appear likely to result in victories for extreme candidates who are unfriendly to markets.

Market prices don’t seem to reflect the scope of problems unfolding in Turkey, Venezuela and some other countries.

It might be tempting to invest in some countries that appear to be safe havens, such as India and Mexico. But it’s unlikely their markets can completely delink from problems in other emerging market countries. Economist Carmen Reinhart recently called today’s emerging markets a “slow motion” crisis, according to Barron’s.

U.S. investors need to pay attention to emerging economies because of the potential for problems in those economies to affect the global and U.S. economies. Historically, it’s taken a severe, widespread decline in emerging economies to have a significant effect on the U.S. economy and markets. We’re not at that point. But it could happen, especially if the trade conflicts with China escalate or China mishandles the transitions it is making in its economy.

The Data

Manufacturing activity in New York continues to be solid, according to the Empire State Manufacturing Survey. It was reported at 19.0. That’s down from last month’s 25.6, but still indicates solid growth. The more moderate growth rate eased some worries that the sector might be exceeding its capacity.

The Philadelphia Fed Business Outlook Survey reported even stronger activity. It rose to 22.9 from 11.9 last month. Most components of the survey are higher than last month. But survey respondents reported less pressure from price increases in the latest month.

Home builders remain confident. The NAHB Housing Market Index was unchanged at 67. This is below the recent high of 73 reported in January but within the solid growth range the index has been in since the start of 2017.

Housing starts increased 9.2% for the month, and the previous two months’ numbers were revised higher. Over 12 months, housing starts were up 9.4%. But most of the increase was in apartments. Their starts were up 38% over 12 months. Single-family home starts were up 1.9% for the month and declined slightly over 12 months.

Single-family home starts had a strong year in 2017, so it shouldn’t be a surprise that the 12-month growth seems weak. Apartment starts probably are nearing a peak, and single-family home starts are likely to continue a slow, steady recovery from the financial crisis.

New unemployment claims declined another 3,000, setting new record lows for weekly, four-week and continuing claims numbers.

The Markets

The S&P 500 gained 0.73% higher for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 1.60% and completed a record 13 trading days in which it closed above its opening level. The Russell 2000 declined 0.57%. The All-Country World Index increased 1.41%, while emerging market equities rose 2.70%.

Long-term treasuries fell 1.96% for the week. Investment-grade bonds declined 0.53%. Treasury Inflation-Protected Securities (TIPS) lost 0.62%. High-yield bonds edged up 0.01%.

On the currency front, the dollar fell 0.28%.

Energy-based commodities rose 0.34% for the week. Broader-based commodities fell 0.26%, as did gold.

Bob’s News & Updates

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I’m now a regular contributor to the Forbes.com blog. You can view my contributor page here.

Do your heirs know how to handle an inherited IRA? If not, they’ll join the long list of heirs who made simple mistakes that triggered additional taxes and penalties. To avoid this result, be sure your heirs have a copy of Bob Carlson’s Guide to Inheriting IRAs.

Some Reading for You  

This article discusses a lot of misunderstandings about leveraged ETFs.

The issues to consider when deciding whether to stay in your home or downsize are reviewed in this article.

This article discusses a new federal law that allows you to freeze your credit reports for free.

I comment and link to these and other items on my public blog.

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