I’ve created a short (under five minutes) new video which identifies opportunities which have arisen this year during the rhetorical trade war which the president has been waging, especially against China.
What we see is that so far this year emerging markets have been performing poorly. Some of that is due to specific political risk in specific countries. For example, Turkey and Brazil have been the world’s worst performing stock markets, at least compared to a universe of emerging markets or higher. But they both have been dealing with political crises. Brazil impeached and then convicted a president; has been suffering from extremely high inflation; and has had massive labor strikes in response.
Turkey had an election, which isn’t necessarily an inherent crisis, except that the ruling party suppresses dissent and uses elections to move towards increasingly authoritarian government. Plus, the Erdogan regime created a huge bubble by keeping interest rates too low for too long. That created a debt bubble, which was even more problematic than most debt bubbles because it was denominated in currencies other than the Turkish Lyra, and as the Lyra has fallen, paying back debt is harder and harder since Lyra buy fewer Euros.
Those two idiosyncratic examples aside, the general pattern has been that EM Asia has been where most of the underperformers have been. Not the worst underperformers, but the largest proportion of underperformers. This has happened, not due to bad economic growth – that zone has been growing at a faster pace than the rest of the world. Nor has it been a lack of profit growth – profits have been going up there more rapidly than the rest of the world. The problem has been valuation. Valuations are getting compressed, which is to say that prices have been dropping at the same time that earnings have been rising. This makes EM Asia in general ‘on sale’.
Why is that section of the global financial markets on sale? The Trump trade war. His rhetoric has targeted China, and most of Southeast Asia is a feeder system for Chinese production. When the president tweets, Asian markets fall.
But data show that for long-term returns, buying low is perhaps the most important single factor. Yes, sometimes certain countries or companies deserve to be on sale. But in general, low valuations correlate with better future returns. That is especially true when the nations at issue have strong rule of law and high levels of economic freedom. This makes them agile enough to bounce back from trade wars, to find other trading partners (for example, Europe… for another example, each other). As the US has been withdrawing from Asian trade deals, the deals have gone ahead without us. Highly economically free nations, currently trading at steep discounts, are a higher probability zone to meet long-term return goals, so long as you don’t mind thinking in the long-term.