On a year to year performance basis, the Emerging Markets
Index has soundly beat the S&P 500 index,
notching a 7.5% gain against the U.S.
large cap benchmarks, a 1% increase,
according to Bloomberg data at the time of this writing.
This has garnered much attention from the financial press,
as some pundits continue to speculate that the era of American exceptionalism
has possibly come to an end, even while a number of E.M.
economists are sputtering and possibly would not fare
well in a drawn out global trade war.
Some investors are adjusting portfolio allocations
to feature more EM exposure and less U.S..
But is this the right move now for long term investors
who are trying to build wealth in stocks over time?
In short, we don't think so.
A quick glance
of the emerging market index performance over the past 20 years
shows the index meaningfully below
the level seen in late October 2007,
just before the start of the Great Financial Crisis.
Over the same time frame,
the S&P 500 is up nearly 400%,
while countries like China are trying to turn their economies more towards
domestic consumer consumption and reduce
their reliance on exports for growth.
The fact remains they are still dependent
on the developed world, especially U.S.
consumers buying all their stuff.
We believe global trade volume in the near-term
are likely to remain subdued as developed economies slow.
That will weigh on the emerging market
earnings.
Much of the outperformance in the emerging markets
this year can be traced to a combination of factors.
First, coming into this year,
US equities, as gauged by the S&P 500, are not cheap.
Investors were more
counting on robust performance
from not only the large cap tech
and tech like individual companies,
which have been a big influence on the index in the past couple of years,
but also the view that earnings and individual equity performance
within the S&P 500 would show
more of a broadening trend
more sectors.
Industry groups and individual stocks making up the S&P
500 are participating in the rally may be a positive sign,
in our view, but uncertainties over tariffs and related growth and inflation
concerns weighed on the S&P performance
in the first three months of this year.
Other factors at play have included consensus
EM earnings estimates for coming quarters appearing to bottom out,
and a number of EM economic data
reports came in modestly better than expected.
We may see
emerging market, economic and earnings expectations
that are not likely to pan out in the coming quarters.
For investors that are carrying emerging market equity exposure
above the recommended portfolio weightings,
we suggest trimming from that position
and reallocating towards the favored U.S.
large cap equities and U.S.
mid-cap equities.
We think the rally in emerging markets
is well ahead of the economic fundamentals.
As a result, we are not chasing the E.M.
outperformance we have seen so far this year.
We remain underweight.
In summary, emerging markets
earnings estimates for the coming quarters are appearing to bottom out.
Some economic data came in modestly better than expected.
We believe the Rally in Emerging Markets Index
is well ahead of the economic fundamentals.
We are not chasing the E.M.
outperformance.