Emerging Markets Opportunity Still Emerging

weekly market commentary 11/17/14

The S&P 500 Index hit another set of fresh record highs last week (November 10 – 14, 2014) and has achieved the midpoint of our total return forecast (10 –15%) for the year with a 12% return year to date. While we continue to recommend keeping the majority of equity allocations in the United States, as we have for a while, we think it is a good time to look at opportunities that have lagged behind the strong U.S. stock market and may have become attractively valued, possibly setting the stage for a reversal. One such area is emerging markets (EM).

It has been another tough year for EM equities. The MSCI EM Index has returned just 1.4% year to date, far behind the S&P 500 (though MSCI EM Index has outpaced the developed foreign benchmark, the MSCI EAFE Index, which has returned -2.6% year to date) [Figure 1]. EM have struggled for many reasons, including but not limited to lackluster earnings, Federal Reserve (Fed) tapering and the subsequent end of quantitative easing (QE), related concerns about current account deficits due to trade imbalances and borrowing abroad, geopolitical unrest in Ukraine and the Middle East, the drop in commodity prices, a strong U.S. dollar, and growth fears in Europe and China. So with all of those challenges facing investors, is it time to buy EM?
To answer that question, let’s look at fundamentals, valuations, and technicals.

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