August was characterized by extremely limited price fluctuations on the financial markets. In the US, for example, there has not been a single day in which stock prices have changed by more than 1 percent. While developed markets as a whole finished the month almost unchanged and with a slight loss, the equity markets of emerging countries gained once again; the MSCI EM index rose about 2,3%..
Within the Emerging Markets universe the trend in value was as homogeneous as it hadn't been for some time. There were no significant upward or downward deviations. Capital flows into emerging market equities and bonds continued. In July and August alone, they amounted to around 42 billion. of dollars. However, bond prices remained rather flat and emerging market currencies overall even lost slightly in August. One explanation could be that the aforementioned inflows refer exclusively to the financial markets.
At the same time they registered also strong capital outflows from Emerging Markets, in particular outflows driven by the real economy via the banking sector. A significant portion of these should, however, be attributable to China, as the country continues to invest heavily overseas. At the end of the month, the focus was on the traditional central bank meeting in the US town of Jackson Hole and in particular on the long-awaited speech by the US Fed chair.
In the end, the latter maintained the ambivalence of its statements on the monetary policy practiced for several months. The speculations about upcoming interest rate hike (when, how much and if) therefore it will continue. The market-priced probabilities of interest rate hikes recently increased slightly due to weaker US economic data, but have already declined again in the meantime.
Overall, the situation has consolidated in recent months going from a trend reversal to an above-average performance of emerging market equities. Since the beginning of the year, the MSCI EM index has posted a gain of almost 15%, significantly higher than the benchmark index of developed markets. Globally active asset allocators have again started to increase their shares of Emerging Markets; however, many equity investors are still underweight emerging countries.
Even if there are obvious reasons to pay more attention to emerging markets. Economic growth compared to previous years is much lower, but seems to have stabilized in the meantime. Current accounts improve. Furthermore, most emerging countries are quoted at steep discounts which are only partially explained by higher political risks.
Contrary to most developed markets, in emerging countries corporate earnings are expected to increase slightly in 2016 and are even expected to see a sharp double-digit increase in 2017. However, it must be said that earnings estimates for 2017 are probably too optimistic; however, this also applies to most developed markets.
Despite these arguments in favor of emerging market equities, it should be reiterated, in general, that a good selection of countries and sectors should continue to be very important. Strong credit growth, which is unsustainable in many emerging countries in the long run, also remains the Achilles' heel for future economic and earnings growth.
