In this commentary, which appears in September’s edition of IPE, William Palmer and Michael Levy explain why they believe the factors that have contributed to the weak share price performance are temporary in nature, and growth prospects for the asset class remain attractive.
Emerging markets (EM) equities have undoubtedly suffered a difficult first half of the year. Several factors have contributed to the weak share price performance, and in our view, these represent temporary headwinds to an asset class in which valuations and growth prospects remain attractive.
In this article, we’ll discuss these headwinds and the factors that have contributed to the recent weakness. While each of these presents legitimate concerns for investors, we believe they are outweighed by an earnings outlook that remains healthy, and valuations that appear to already factor in these risks. In short, investors should retain confidence in the EM equity asset class.
U.S. and China Trade War
A major contributor to current market sentiment is the trade dispute between the U.S. and China. The risk of an escalation in the dispute has created unwelcome uncertainty for global investors. The bilateral trade deficit (US$365 billion) between the two nations, which accounts for about two-thirds of the total U.S. trade deficit, is a major source of contention. China has acknowledged this imbalance, but there is still disagreement over the size and timing of achieving an acceptable bilateral trade deficit reduction. Frustration has built on both sides and the U.S. and China have recently engaged in a tit-for-tat exchange of proposed trade tariffs.