5 Stocks To Buy On Rebounding Emerging Markets

An all time favorite of investors, emerging markets had fallen out of favor recently. Years of high growth was displaced by gloom in the wake of the crisis of 2008. Several reasons were responsible for this; key among them were the plunge in commodity prices, weak export growth and political instability.

For instance, the MSCI Emerging Markets Index had lost 11% since the second half of 2011. This is in sharp contrast to the 49% surge experienced by developed markets. However, the surprise Brexit verdict has turned things around completely.

In fact, the MSCI Emerging Markets Index has gained more than 10% since the end of June, exceeding developed countries’ performance by 3.1%. Adding stocks from emerging markets would make for a smart choice at this point.

China’s Growth Stabilizes, Commodity Prices Recover

The health of China’s economy is crucial to the performance of emerging markets as a whole. With a GDP of nearly $11 trillion, it is equivalent in size to all the 10 other emerging markets, which come next, taken together. In spite of the slump in the economy, some promising signs are visible on the horizon.

The recent reading of 6.7% growth in second quarter GDP indicates that the Chinese economy is stabilizing due to its government’s efforts. Additionally, the country is slowly transforming into a consumer driven economy from one dominated by the industrial sector.

Meanwhile, a rebound in commodities has provided further respite to emerging market investors. Material prices are not surging, but the 20% increase in the Bloomberg Commodity spot index from the levels experienced in January has removed a major obstacle to the success of emerging markets. At the same time, prices remain within a reasonable range which means demand is unlikely to be hugely impacted.

Emerging Markets Likely to Grow Faster

Traditionally, emerging markets have always grown at a faster pace compared to developed economies. In 2015, growth in these countries, however, exceeded developed countries’ growth by only 3%. This is nearly half the rate experienced around six years ago. Having said that, growth is likely to pick up this year with the gap widening consequently.

This is particularly true for countries recovering from a recession, such as, Brazil and Russia. Indexes of manufacturing and services are already improving, with several of these gauges already hovering above 50, which indicates expansion is occurring. Brazil has just elected a president who is likely to improve the investor climate.

Profits Set to Grow, U.S. Interest Rates Remain Low

Stabilization in the most popular metric of company profitability, namely, earnings per share is occurring across emerging markets. These had fallen by more than 33% from levels last seen more than four years ago. This in turn has fuelled the recent rally across most emerging equity markets. At the same time, valuations remain low providing further impetus for growth in prices if profits increase.

Meanwhile, the Federal Reserve is unlikely to raise rates due to concerns over the fallout of the Brexit vote. This in turn has led to a rise in emerging market currencies versus the dollar. Stronger currencies help to curb inflation, eliminating the need for rate hikes which stall growth.

Our Choices

Several factors are contributing to the resurgence of emerging markets and their prospects continue to improve. It seems that the traditional trend where they outperform developed countries on both the growth and company earnings front is likely to return.

This is why it makes good sense to pick emerging market stocks at this time. It is also important to pick winning stocks.

This is where our Zacks Investment Research

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Written By: Zacks Investment Research