Among the gloom and doom of four years of emerging markets relative underperformance vs. the developed world, money management executives have found several bright spots.
While the headwinds that have been battering emerging markets do not look likely to disappear in 2016, cheap valuations are beginning to attract the attention of money management executives and their clients.
The slowdown in emerging markets growth, continued strong dollar rally, and the ongoing reversal in the commodities super cycle — particularly in the materials sector — will continue to put pressure on emerging markets.
These issues date to 2011, and are “bad for the outlook as none look like they are poised to clear in the near terms,” said George Iwanicki, global co-head for emerging markets asset allocation at J.P. Morgan Asset Management, based in New York. The slowdown in emerging markets growth has resulted in the “effective disappearance of earnings growth in emerging markets,” with the growth premium vs. developed markets at the low end of the historic range.
“It is hard to see why 2016 should be the year of a sharp rebound. It is hard to make the case for any reversal in 2016, but the hope is that some will begin to alleviate or finish running their course,” said Mr. Iwanicki.
The good news, however, is that valuations still look relatively cheap for underlying equities, he said.
While the time is not right to be reallocating to the asset class, Mr. Iwanicki said he is encouraging clients to start setting parameters around when they might make the move. “We are at valuation levels where I personally continue to encourage longer-term investors not to allocate back to the asset class today, but rather we are at valuation levels where we have to be thinking about what is the level at which I buy? What are the catalysts to get more buying, or what are the valuation levels that I would consider adding more (exposure) even without a catalyst?”