- We are optimistic about 2020 emerging markets (EM) equities performance. We expect economic cycles in the key EM Asian economies to bottom out. The consensus on US Equities is for a continued strong-to-resilient 2020 performance, and we anticipate that this will keep risk appetites of investors elevated. At this point, the relatively attractive EM growth outlook should draw fresh attention.
- The overall valuation premium of US Equities over EM Equities widened through the past decade and remains stubbornly high. A normalization of US-EM equity premium, favoring a relative re-rating of EM valuations, seems overdue.
- Year-to-year major allocation switches are not our forte. We stay focused on long-term investment themes and fine-tune our sector and country allocations based on our fundamental outlook. This year, we renew our focus on domestic demand themes in EM Asia. The US economy is slowing, and we anticipate that as investors seek resilient growth, the domestic demand-focused sectors (particularly in EM Asia) will stand out.
- Several uncertainties continue to weigh against risk assets, and a cautious fundamental research-driven bottom-up approach remains key for investment in EM equities, in our view
EM Equities 2019 Performance Review: Reflects Domestic Demand Resilience
Last year at this time we had projected an upbeat outlook for EM equities. In absolute terms, the MSCI EM Index’s approximately 19% 2019 return is strong. However, it pales in comparison to the S&P 500’s total return of 32% in the same period. Thus, EM equities once again underperformed US equities by a substantial margin. As the trade war weighed on overall sentiment, the domestic-focused sectors that have remained our strategy’s bias, like consumer discretionary and technology in EM (see the chart to the right) have performed better in 2019 than other sectors.
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