Weekly Buzz: Emerging Markets Make Magic

02 June 2023

📈 Three Reasons Why You Might Want Emerging Market Stocks

Uncertainty from the US debt ceiling discussions is just the latest factor making emerging market (EM) stocks interesting again, but the appeal of these assets extends well beyond near-term uncertainties.

Here are three longer term reasons to look beyond the US and Europe for investments: 

  1. With US consumers slowing their spending roll, the risk of a US recession (and further weakness in the US dollar) will boost demand for diversification into EMs. 
  2. The ongoing shift toward green initiatives and the diversification of supply chains will be positive for many EM companies. According to UK investment firm Schroders, India, Vietnam, Poland, and Thailand could see the biggest demand as developed market companies seek alternative suppliers. 
  3. EM stock valuations still look cheap and are trading at a significant discount to developed market stocks.

The chart above from Schroders shows that returns across most developed markets (DM) have been powered by an expansion in valuation multiples (blue bar), but EMs have been left out of this boom despite in-line earnings growth (yellow bar).

EM stock ETFs can be highly skewed toward certain economies, like China and Taiwan, and you’ll want to pay close attention to those allocations. Concentrating your positions in just a few emerging market economies can expose you to greater volatility, so it makes sense to hold a portfolio that is diversified across many.

How can you capitalise on EMs?

  1. Our General Investing portfolios powered by StashAway or the one by BlackRock are well-diversified, and include exposure to EM equities as well as EM bonds. 
  2. If you want to increase your exposure to EM equities, consider our Flexible Portfolios which allow you to customise specific asset classes under the Global Equities tab. 

This section was written in collaboration with Finimize.

Circling back to the US debt ceiling… 

Over the weekend, US President Joe Biden finalised a deal to raise the debt ceiling. As of Thursday (Asia time), it looks like this episode is drawing to a close as the bill heads to a vote in the upper house of Congress. Assuming it gets passed before the X-date and the government can continue to pay its bills – the big question, then, is what’s next? We’re keeping a very close eye on the possibility that a resolution could lead to a trickier investment environment. That’s because as the US Treasury is able to resume issuing bonds again, that could drain liquidity and weigh on markets.

🎓Jargon buster: Emerging markets  

An emerging market (EM) is like a spunky startup in the business world. It’s a rapidly developing economy that is all about high growth, a rising middle class and market reforms. Think of it as an eager underdog hustling to make a name for itself among the big players in order to catch the eye of foreign investors. India, Mexico, Vietnam, Saudi Arabia, China, and Brazil are just some of the rising stars in this game. 

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