5 reasons why EM stocks can outrun US stocks in a few years

1. EM is a defensive play

This is completely counterintuitive. But history shows it’s true. During the three bull markets since the mid-1990s, EM significantly outperformed developed markets during the final years of the economic and market cycles.

2. EM looks cheap

Emerging market stocks are cheaper than U.S. stocks, one reason fund manager Charles Shriver has been increasing EM exposure in the T. Rowe Price Global Allocation Fund RPGAX, -0.24% over the past several months. The fund, which beats its category by 2.1 percentage points annualized over the past five years, is about 50% overweight emerging markets compared to its neutral allocation.

3. But EM is growing a lot faster

Deutsche Bank economists expect EM gross domestic product (GDP) growth to come in at 4.6% in 2019 compared to 2.5% for the U.S. and 3.5% for the global economy. EM analysts at Franklin Templeton expect the return of EM earnings growth momentum in 2019, following last year’s slowdown.

4. The Fed has turned dovish

This is one of the main reasons USAA has an EM overweight, says Wasif Latif, the head of global multi-assets at the financial-services company. A dovish Fed means the dollar should weaken, which typically benefits EM stocks. One reason is that many EM countries sell commodities, and commodity prices tend to go up when the dollar weakens

5. A resolution in the trade war will provide a catalyst

“I assume China and the U.S. will work out a deal because it is in both parties’ interests,” says Lewis Altfest of Altfest Personal Wealth Management, which has $1.25 billion under management. He doesn’t think President Donald Trump will get all the concessions he is looking for. But the deal will be enough to calm worries about trade, and spark investor interest in emerging markets.

Five reasons emerging-markets stocks could outperform U.S. stocks for several years, MarketWatch, Feb 22