The Continuing Case for Emerging Market Stocks

April 25, 2013 | Jesus Jimenez, Principal

This week’s Chart of the Week examines the relative performance of equity markets from a global perspective. Since January 1, 2013, U.S. large-cap stocks have returned a cumulative 10.03%, international large-cap stocks have returned a cumulative 4.38% and emerging market stocks have returned a disappointing -1.92% through March 31, 2013.

Many factors can be attributed to the underperformance of emerging markets including countries’ management of their monetary policies. With slowing global demand and inflationary pressure taking a toll on emerging markets, countries have been forced to adjust their monetary policies. Brazil has increased interest rates to combat inflation, which has impacted the Brazilian Real. More generally, a combination of slowing demand for their products and rising inflation has weakened the export market for emerging market countries. In contrast, Japan’s recent activity to devalue the Yen had made its exports significantly more attractive, thus boosting its competitiveness, a move that has benefitted returns for the MSCI EAFE index.

Currently, emerging markets trade at a price-to-earnings ratio of 12 compared to 15 for U.S. large-cap stocks. This favorable valuation level relative to U.S. stocks combined with superior long–term growth prospects continue to make emerging market stocks an attractive investment option, despite recent market struggles.