Something Completely Different

Eran Peleg, CIO April 4, 2018

You could have expected a completely different outcome.

Given the equity market sell-off, concerns about trade wars and rising US rates, you might have expected emerging market stocks to significantly underperform their developed market peers. Each of the above factors alone would typically be particularly negative for emerging market assets. Here we got them all together. Could not be a good thing.

And yet, emerging market equities have held up very well. Since January 26th, when the equity market rout began, until the end of the first quarter, emerging markets performed pretty much in line with developed markets – with both dropping around 7-8% (as measured by MSCI World and Emerging Markets indices, in US dollar terms). In fact, over the entire first quarter, since the start of the year, emerging market equities are up +1.4%, while developed markets have returned -1.3%.

Emerging economies are not as vulnerable as they used to be. One reflection of this is continued upgrades of the credit ratings of emerging countries over the past 15 years. Today, China’s credit rating (A+) is only two notches lower than the UK’s (AA), and Russia’s (BBB-) is only one notch lower than Italy’s (BBB). This helps but is not sufficient to drive financial asset prices in the short-term. What is more relevant in the short-term is economic momentum – and what we have seen is that since February, emerging markets (except for China, perhaps) have shown the sharpest pick-up in momentum, while developed economies have slowed.

Good signs of resilience in face of what could have been very challenging market conditions.