markets

Volatility Back With a Vengeance for Emerging-Market Stocks

  • Realized price swings climb to highest in almost 12 months
  • Investors caught between booking gains and prospects for more

Harrison Says It Makes Sense to Be A Little Cautious

As the best year for emerging-market stocks since 2012 draws to a close, investors are experiencing more than just a 30 percent return -- volatility has staged a comeback.

Thirty-day historic volatility on the MSCI EM Index has climbed to the highest in almost 12 months, no mean feat in a year when swings in developed-market stocks and bonds plumbed record lows.

The uptick in realized price swings comes as U.S. monetary policy tightens and the recent tumult in tech stocks sparked a flurry of trading in the year’s best performing assets.

It seems investors are caught in a conundrum. Even after their advance in 2017, developing-nation stocks look attractively valued compared with their developed peers. With the synchronized global growth story on track, there could well be more gains ahead so bullish fund managers are ready to buy on any dips. On the other hand, the era of easy money and low borrowing costs is drawing to a close, which could spell trouble for emerging markets. That’s caused some outsized declines as nervous investors lock in profits.

“The big gains in EM assets seen over the past year are unlikely to be repeated in 2018,” analysts at Capital Economics Ltd. wrote in a note Thursday. “With earnings growth set to slow and risk appetite likely to wane, EM equities will do little more than tread water in 2018.”

Still, there are signs the big price swings may be coming to an end, at least in the short-term. The CBOE Emerging Markets ETF Volatility Index, which reflects expected volatility for options on the iShares MSCI Emerging Markets ETF, has been falling all month. In other words, the market doesn’t see the turbulence as here to stay for now.

— With assistance by Sid Verma

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