It was emerging markets wot done it. The US Federal Reserve fought shy of hiking interest rates inSeptemberbecause of theimpact on emerging markets, or ratherChina. The Feds remit is to consider US inflation and employment, but it cant ignore majorcreditor nations such as China any longer.Isolationism doesnt cut it any more, because the US economy will catch anyblowback.
Partners In Debt
Emerging markets have seizedadvantage of record-low interest rates to load up on dollar-denominated debt, and a stronger dollar would make this will bemore expensive to service. Itwould alsowould hit growth in countries whose currencies aretiedto the greenback. If theircurrency pegs started to buckle under the strain, they would have to dump short-dated US Treasuries to maintain their exchange rates, which would force US domestic interest rates higher.
So emerging markets can breathe a little easier, at least until the next Fed meeting inOctober, or maybe December, or failing that, some vague point in 2016. The consensus is that emerging markets are still too risky to invest in, after suffering more than $1 trillion of capital outflows in the past year. But investors should be wary of any consensus, especially thosewho like to takeadvantage of market sell-offs to buy shares at discountprices, as we do at the Fool. And not everybody agrees that emerging markets are toxic right now.
The Worse, The Better
It has undoubtedly been a rotten year for emerging markets. New research from online investment manager SCMDirect shows the MSCI Emerging Markets Index is downalmost 14% year-to-date, leaving stocks trading at a 39% discount to their developed peers, the lowest for 12 years. Interested?
Alan and GinaMiller, the experienced investors behind SCM, saythesefigures suggest that emerging market stocks could make a potential gain of nearly 25% over the next 12 months. Like the Fool, theythinkthe besttime to buy shares is when markets are volatile and investors are nervous
Meet The Millers
The Millers have pored over the history of emerging market equity performance and volatility since March 2000 and found the average total return from investing at volatile times like these was 24.4%. In the vast majority of cases, investors received a double-digit return over the next year, with no negative recorded returns.
That certainly chimes with everything the Fool hasstood for over the past few decades. But it would still take a brave investor to leap into emerging markets today.You might want to look forclearer evidence that the Chinese economy is stabilising and commodity prices have stopped falling.
You might also like to waitto see what happens to emerging markets when the Fed finally does hike interest rates, as thatmight be an even better buying opportunity. The problem isthat if you wait until the picture becomes clearer, by then it is too late. The bargains will have been snapped up.
It would take a brave contrarian to blaze away atemerging markets right now. But it might be worth stockpiling your ammunition.
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