Emerging-Markets Stocks Took The Lead Last Week

Emerging-Markets Stocks Took The Lead Last Week

by James Picerno, The Capital Spectator

Emerging-markets equities enjoyed a solid rise last week among the major asset classes, based on a set of proxy ETFs. Vanguard Emerging Markets Stock (VWO) posted a solid 4.5% total return for the five days of trading through Nov. 20, edging out the number-two performer for the week, US real estate investment trusts (REITS), based on Vanguard REIT (VNQ).

Last weekā€™s boost for emerging-markets stocks inspires hope that a turnaround for this long-battered sector may be unfolding. Perhaps, but there are still formidable head winds to consider. ā€œEmerging markets are under pressure as the US raising interest rates in December is a done deal,ā€ Kenix Lai, a foreign-exchange analyst at Bank of East Asia, tells Bloomberg. ā€œThe dollar will get stronger while Chinaā€™s economic fundamentals havenā€™t shown any signs of improvement.ā€

Meanwhile, momentum for stocks in emerging markets overall for a US-dollar-based investor continues to reflect a bearish hue. Although last weekā€™s rally pushed VWO slightly above its 50-day moving average, the 50-day average remains well below its 200-day counterpart. Valuation metrics for this slice of the worldā€™s equity markets may look attractive, but itā€™s not obvious that a sustained rally is currently underway.

Meanwhile, the bear market in commodities generally rolls on, which is another factor weighing on emerging markets that rely on firm pricing for raw-materials exports. The broadly defined iPath Bloomberg Commodity ETN (DJP) slumped again last week, dipping 1.7%ā€“the biggest weekly loser among the major asset classes.

Commodities remain the red-ink leader in the trailing one-year return column too. Indeed, DJP is now lower by more than a third for the 12 months through last Friday (Nov. 20). Thatā€™s a long way from the one-year performance leader: US REITs (VNQ), which is ahead by 4.7% on a total-return basis.

gmi.etfs.1ytr.barplot2015-11-23

The prospect of rising interest rates in the USā€”the Fed is currently expected to start squeezing monetary policy next monthā€”is considered a negative for the relatively high-yielding REIT sector. But as the FT reports, some real estate executives say the outlook for higher interest rates may not be as troubling as some analysts expect. Property-investor Brookfield Asset Management, for instance, recently explained in a letter to shareholders:

ā€œWe have been running our business with the expectation that interest rates will increase, particularly in the United States; in fact, we welcome this. Interest rates will rise because the economy is improving and that is positive for business,ā€ Brookfield Asset Management told its shareholders at the end of the second quarter.

ā€œReturns may be slightly less going forward, but cap rates (the inverse of the return) have been stubbornly high relative to interest rates for one specific reasonā€‰.ā€‰.ā€‰.ā€‰that everyone knew interest rates were going up.ā€ At the same time though, the letter noted, ā€œwe have been net sellers of assets in the US, given the robust amounts of capital available to investorsā€.

emerging markets

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