Emerging market stocks should recover after weak 2013 start, says Reuters poll

TradingPub Admin | March 25, 2013

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While emerging market stocks have had a lackluster start so far in 2013, these equities should perform better going forward, according to a recent Reuters poll. 

Risk aversion
The recent lackluster performance of equities representing these economies has been attributed by many market experts to the growing risk aversion of global investors, as the media outlet reports that there are concerns that the euro zone fiscal crisis could deteriorate and also that the U.S. federal budget cuts could provide the global economy with headwinds. 

Bloomberg reports that the willingness of global investors to tolerate risk is key to the values of emerging-market stocks, as the "institutional frameworks" of the economies that are tied to these equities "are still a work in progress," Rupal Bhansali, who contributes to the management of around $5 billion as a New York-based chief investment officer for international equities at Ariel Investments LLC, told Bloomberg. 

Sluggish performance
During this year through the week ending on March 22, MSCI Emerging Markets Index fell 3.8 percent, which resulted in the sharp rally that the group of stocks has enjoyed since October 2011 falling to 22 percent, according to the news source. This gain compares to a 33 percent surge that the MSCI World Index experienced during the period. 

Reuters reports that stocks representing companies in Brazil, India, Korea and China have all lost value so far this year. 

Breaking historical patterns
During the previous six bull markets, emerging market equities outperformed those of more developed nations, and the higher gains were attributed to sharper fluctuations in these stock values, according to Bloomberg. 

"The old rules of thumb may need to be questioned," Wayne Lin, a money manager working for Baltimore-based Legg Mason Inc., which has around $661 billion under management, told the news source during a phone interview. "It is surprising to many investors that emerging markets haven't participated in the rally." 

The sharp disparity that has existed recently between the global and emerging market stocks is illustrated by data compiled by the media outlet, which reveals that during the current market expansion, the equities of the less developed nations lagged those of countries worldwide by 37 percent, when adjusted for volatile price movements. 

Emerging market equity surge
Reuters reports that the gains generated by stocks in Western nations could be hindered by the risks posed by the euro zone and the spending cuts caused by sequestration in the U.S., and that this situation could result in emerging market equities drawing positive visibility once again. 

"We expect the positive equity market environment to continue for now," Gerhard Schwarz, head of equity strategy at Baader Bank, which is headquartered close to Munich, told the news source. "Even though political risks remain both in the U.S. and the euro zone, central bank action taken in 2012 has substantially reined in fears over systemic risk."

He predicted that the actions of these major financial institutions will help to improve the sentiment of businesses, the media outlet reports. 

Bulls predict strong gains
Schwarz is not the only market expert who has high expectations of how emerging market equities will perform going forward, as bulls have predicted that these stocks will enjoy more robust performance in the next stage of this market phase as risk aversion deteriorates, according to Bloomberg. 

The media outlet reports that global investors have frequently been rewarded for their willingness to tolerate the sharp fluctuations that equities of developing nations have experienced, as during bull markets, these stocks have outperformed those of developed nations by 46 percent on average, the media outlet reports. 

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