Until last month, stocks in developing countries fell to the lowest level since 1988 relative to their US peers, after underperforming in nine of the last 10 years. But November brought a change: Stocks are posting the fastest rise since March 2016 amid expectations of a less aggressive Federal Reserve and cheaper valuations that have pegged them at a 36% discount to the S&P 500.
“The US dollar is perhaps the most important factor in the allocation between emerging markets and developed markets,” strategists led by Alain Bokobza, head of global asset allocation at Société Générale SA, wrote in a note. “Unlike their developed market peers, emerging market stocks tend to rise when the dollar depreciates.”
The US currency has already peaked along with inflation, which is “great news” for emerging markets, Morgan Stanley analysts wrote this week in a note.
The moving correlation coefficient between emerging market stocks and US stocks fell to minus 0.1 on Tuesday, compared to a positive ratio of 0.54 in July. The relative movements based on 60, 90 and 120 day time frames have also decreased, showing that the two groups are moving independently of each other.
This break came at the expense of the performance of the S&P 500. The MSCI Emerging Markets Index rose 10% this month, compared with a 3.4% advance in the US. That brought the ratio of the two indices up 6% in November, the best outperformance since 2018. by the developing world.
Emerging markets may be better positioned to weather the turbulence of a global economic slowdown, as their average growth is set to widen its gap with the expansion of US gross domestic product. In 2022, developing nations are expected to grow just 1.3 percentage points faster, half the typical difference between they. However, economists project that the gap will expand to 3.6 percentage points in 2023 and 2.9 percentage points the following year.
In addition to the growth differential, stocks in these most vulnerable countries are also cheaper. The MSCI index’s valuation discount to US stocks is a total of 10 percentage points higher than the average 26% decline over the past 15 years. Meanwhile, analysts have begun raising estimates for emerging market companies, suggesting that the worst is over for corporate performance.
Source: Ambito
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