Equity investors in the emerging markets (EM) have suffered significantly as a result of the escalation of the Turkish crisis. But a closer look at the EM index reveals that not all emerging markets are in crisis mode.
The MSCI Emerging Markets Index has fallen 7.2% in US dollar terms since the beginning of the year to the end of August. The crash of the Turkish lira, followed by similar problems with the Argentine peso, has led to heightened fear of contagion. But our research shows that 80% of the index is in countries with positive current accounts, taking into account foreign direct investment (FDI). We include FDI because these investments tend to be stable in the long term and seldom come off quickly, even if a country gets into trouble.
The individual countries also react differently to EM turbulence. During the past 15 corrections over the past decade, some countries, such as Malaysia or the Philippines, fell far less than the index. Others fared worse, such as Brazil and Russia, whose downside participation exceeded 100%.
So how should equity investors react to economic worries? We believe that thorough economic analysis is essential for emerging markets, as currency crises often lead to a similar decline in all other asset types. Therefore, even solid stocks suffer from these crises.
On the other hand, a positive economic outlook alone should not serve as an investment basis for a portfolio. Instead, look for companies in stable regions with solid business models, stable balance sheets, and robust future prospects to support equity returns.
For example, Thailand and Taiwan have solid foundations and a stable banking sector. Commodity retailers in both countries are thriving even in times of online commerce. India's macroeconomic profile is well balanced, and the country has a strong IT industry.
Even if overarching fears dominate market sentiment, stock selection remains important. EM investors should always look for profitable companies that make good use of their capital. The selection of long-term winners can be very rewarding as soon as the environment improves again. Currently, many such companies are trading at attractive prices and therefore offer higher earnings potential as emerging markets recover from the Turkish crisis.
The opinions and opinions expressed here are neither analyzes nor serve as investment advice or investment recommendation. They do not necessarily reflect the views of all AB's portfolio management teams.
MSCI makes no warranties or representations, either express or implied, and assumes no liability with respect to any MSCI data contained herein.
© AllianceBernstein L.P.
© AllianceBernstein
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