What’s the EM Story? It’s All About Growth - Context

We’ve had, finally, after many years, an acceleration in earnings growth, far faster than the kind of growth we’ve seen in developed markets, and that’s expected to continue into 2018; and I think that’s going to be an important underpinning of strong returns for emerging-market investors.

But I think there’s more, which is that emerging-market equities are now still quite cheap whereas developed-market stocks are trading at relatively high valuations, and I think that difference could narrow. I think emerging-market valuations could come up, giving investors even more return as they recognize that many of the risks they feared at the beginning of 2017 really haven’t materialized.

So, China for example, President Trump, interest rates, the dollar: none of these things for investors have been as bad as feared. And consequently, I think there’s a lot more room for multiple expansion.

One of the other interesting dynamics about emerging markets in 2017 has been this FANG¹ stock phenomenon. Just as in the United States, a very narrow set of stocks in the Internet and mobile-device area has been driving about a third of the returns in the S&P…we see that in emerging markets as well. About five stocks out of 835 in the entire index have driven a third of the return. They’re also in the mobile, e-commerce business, particularly in China and Korea.

And we think that in 2018, investors who’ve had a good experience in those stocks, some of which are up nearly 100%, are going to say, “Well, let me look around and see what other companies are generating strong growth that might be trading at lower valuations.” And so I think that the returns in emerging markets are going to be broader based in 2018, and investors who can get ahead of that and identify other companies with those strong growth prospects, but that trade at lower valuations, are going to be really well rewarded in 2018.

¹FANG: Facebook, Amazon, Netflix and Google parent company Alphabet

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.