August 2017
Emerging Markets to Continue Outperforming
The MSCI Emerging Market (EM) Index has gained 17% in the first half of 2017, with the index hitting a record high in local currency terms.
After a challenging period post the 2013 taper tantrum, EM equity funds are enjoying fund inflows again. Citi analysts continue to find Emerging Market (EM) equities attractive given attractive valuations and improving economic fundamentals.
Market Performance
In the US, the Dow Jones Industrial Average advanced 2.54%, the S&P 500 gained 1.93%, while the Nasdaq Composite jumped 3.38%. European Stoxx 600 slipped 0.40%, for its second straight monthly loss while Japanese markets were mixed (Nikkei 225: -0.54% and Topix: 0.42%).
MSCI Emerging Markets outperformed in July, soaring 5.48%, led by MSCI Latin America (8.17%), MSCI Asia ex Japan (4.90%) and MSCI Emerging Europe (3.46%). Within Asia, Hong Kong’s Hang Seng index rallied 6.05% in July.
- Within EM, Asia has been the outperformer, helped by the improving growth backdrop in China. Europe, Middle East and Africa (EMEA) has underperformed, weighed down by political uncertainty in Russia and lower oil prices.
- In terms of valuation, EM equities are still cheaper compared to Developed Market (DM) equities. EM equities are also currently trading below their average historical levels.
"EM has attracted around $160 billion in portfolio flows in the first half of the year."
- Would the upcoming reduction of asset purchases by the Federal Reserve and European Central bank hurt EM equities? In 2006, policy tightening by the G4 policymakers and the People’s Bank of China (PBoC) caused EM equities to correct 25%, underperforming DM equities by 15%.
- Citi analysts note that back in 2006, EM equities had enjoyed sustained inflows and valuations were also much higher. On the other hand, EM fundamentals, especially external account balances are healthier now.
- Since late 2015, reforms have also helped to improve the underlying fundamentals in many developing countries.
- Given attractive valuations and improving economic fundamentals, Citi analysts continue to favour EM equities, in particular EM Asia.
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