Why Political Turmoil Hasn't Stopped the Emerging Market RallyBy and
Growth gap, earnings, valuations back bullish equity outlook
Stocks rise even as political risks rise from Russia to Brazil
A fired finance minister and political upheaval won’t be enough to stem the rally in emerging-market stocks.
That’s the lesson from the first quarter, when equities posted their best gains since 2012 even as Donald Trump threatened to end trade deals, the U.K. began laying the path for its exit from the European Union, South Korea impeached its president and South Africa fired a finance chief much beloved by investors.
All the chaos was overshadowed by investing fundamentals, according to market participants who point to a surge in corporate earnings forecasts and economic growth that far outstrips expansion in developed countries. Economists predict that growth gap, which widened last year for the first time since at least 2010, will expand in the next three years, meaning a bigger middle class and greater opportunities for businesses. That makes it easy to overlook the political risks.
“There’s no reason why emerging markets shouldn’t continue to do well and probably outperform,” said Patrick Mange, a London-based strategist at BNP Paribas Investment Partners UK Ltd. “In a situation of strengthening global growth, other factors tend to become secondary.”
The MSCI Emerging Markets Index rose 11 percent in the three months through March, taking the valuation to 12.3 times the projected earnings of its members. The gauge added 0.5 percent Monday as of 12:02 p.m. in New York, even as a left-wing candidate appeared headed for victory in Ecuador’s presidential vote, a Brazilian court mulled invalidating the country’s 2014 election results, and reports emerged of a subway bombing in St. Petersburg.
"Markets have become used to the political noise, especially after Brexit and the unexpected election in the U.S.," said Simon Quijano-Evans, an emerging-market strategist at Legal & General Investments Management Ltd. in London. "The question is: When does all of this culminate into a huge balloon that eventually explodes? I don’t think we’re there yet."
These charts highlight the bullish momentum investors are focused on in the face of political drama:
Since January 2016, there has been a rebound in earnings estimates for companies based in developing nations. Analysts raised the profit outlook for the MSCI Emerging Markets Index by the most since September 2010 in the last quarter. Particularly notable was that some of the most politically turbulent nations -- including Russia and Turkey -- saw their forecasts rising to records.
The increase in earnings estimates is keeping a lid on valuations, so much so that developing-nation stocks are becoming cheaper relative to their developed-nation peers even as they rally. The greater discount, coupled with higher growth and earnings potential, makes them irresistible to investors even amid all the political drama.