Fund tracking firm EPFR Global reported inflow of $4.2 billion
into the emerging-market equity and bond funds for the week
ending April 2. A week after, $4.9 billion flowed in. That helped
inflows into emerging market funds reach a 61-week high. Emerging
market equities also witnessed the first fund inflow in 22 weeks
in the Apr 2 week.
This is in sharp contrast to how the year began, as previous
data quoted $40 billion worth of fund outflow from emerging
market equity funds in the first quarter. The outflow had in fact
more than doubled from first quarter of 2013.
Also, iShares MSCI Emerging Markets Index ETF (EEM) is showing
strength now. This ETF tracking index had dropped 1.9% from the
beginning of the year till Mar 31. Since Apr 1, the MSCI Emerging
Markets Index has moved up almost 2.5%.
While there are analysts arguing how the rally will 'run out
of steam,' there are also opinions about why it is an ideal time
to invest in these economies. Let us take a look at the turn of
events affecting emerging markets so far this year before picking
3 winning stocks.
Looking at some of the emerging nations,
iShares MSCI Brazil Index ETF
) has jumped 5.5% so far this month as compared to a 0.8%
increase from the beginning of the year till Mar 31. Mexico has
also shown promise and Egyptian stocks have rallied strongly over
the last one year.
Indonesia's significant trade surpluses strengthened its
currency and boosted growth. India's deficit shortfall estimate
is half of what the nation saw last year at $88 billion. India
has also boosted its borrowing costs.
Russia has also shown improvement with its currency and
benchmark rebounding from the lows hit owing to the Crimean
Factors That Affected Emerging Economies
The reference to Russia brings us to the factors that were
affecting the emerging markets this year. The Federal Reserve's
tapering of the bond repurchase plan, the Russia-Ukraine crisis
and dismal Chinese economic data are the key cases in point.
The original $85 billion asset-repurchase plan of the US
Federal Reserve now stands at $55 billion. This is the result of
the central bank's decision to chop $10 billion from the third
quantitative easing plan every month.
The International Monetary Fund had warned in January that
trimming the stimulus plan could be a potential threat of more
adversities for emerging economies. IMF managing director
Christine Lagarde had called it to be "a new risk on the horizon
and it needs to be closely watched."
Most emerging nations have depended on cash inflow as the
source of financing their growth. The Fed taper meant foreign
investors pulling money out of these economies. The currencies
were to go weaker and it did happen.
On top of respective political issues in the emerging
economies, the Fed taper was an added headwind. At the beginning
of this year, emerging market currencies suffered their worst
sell-off in five years. Argentina's peso had its worst fall since
2002. A threat to the stability of the government in Turkey
dragged its currency to record lows. Separately, Hryvnia,
Ukraine's currency, dropped to a four-year low. South Africa's
Rand saw itself weakening beyond 11 per dollar for the first time
However, some currencies showed strength later. Indonesian
Rupiah, Indian Rupee and Turkish Lira are now up 7.3%, 2.7% and
0.9% year to date, respectively. South Africa's Rand has offset
all its loss and is now up 0.02% year to date. Brazil's Real had
hit a five-month high earlier this month and is now up 6.6% so
far this year.
Russian Ruble and Ukrainian Hryvnia are nonetheless down 7.8%
and 27.1%, respectively, year to date.
Much of the decline in Russian and Ukrainian currency can be
attributed to the Crimean crisis. The crisis at its peak had
dragged Russia's MICEX down by 12% over a month (mid Feb to late
March). Russia's Ruble had at a point slumped 10%. Russia's
central bank had to step in and it hiked interest rates to 7%
The Ruble and MICEX are now up 2.2% and 2.7%, respectively, in
the last one month.
Chinese Economic Data
Chinese economic data have been mostly dismal since the
beginning of 2014.
Reports of larger-than-expected decline in Chinese exports
earlier this year had raised concerns of a slowdown in the
world's second-largest economy. The anxiety further intensified
after the Chinese government reported lower-than-expected yearly
increases in industrial production, fixed asset investment and
retail sales of 8.6%, 17.9% and 11.8%.
Earlier this month, China's State Council has promised of new
measures to match the annual growth estimate. There were
announcement of plans to increase spending on railways,
low-income housing and tax relief for small businesses.
Last week, the Chinese government reported that the world's
second-largest economy grew at 7.4% in the first quarter, more
than the analysts' expectation of an increase by 7.3%.
Time to Sell or Buy?
) cautioned investors to not "chase the rally." On the other
hand, JP Morgan Asset Management believes it is "an attractive
"The catalyst for the rally has been the ending of an
unprecedented period of fund outflows from the asset class rather
than an improvement in fundamentals," stated Morgan Stanley. In
fact, the current earnings season may be the reason behind the
end of the emerging markets' rally. The bank has a 12-month
forward earnings per share outlook for the emerging market index
of $92. This is short of the consensus estimate of $96. Moreover,
Morgan Stanley foresees strength in US dollar riding on improving
However, JP Morgan Asset Management is bullish about the
emerging economies based on the "extremely cheap" nature of the
emerging market shares right now. JP Morgan notes that the MSCI
Emerging Markets index has a price-to-book ratio of below 1.5.
This is the lowest level in seven years.
Moreover, JP Morgan noted that whenever the valuation dropped
below that mark since 1995, the equities have returned over 10%
over the next one year. Following intense selling pressures, the
emerging market equities had returned 27% and 30% over a year in
Jul 1996 and Nov 2002, respectively.
A Bank of America-Merrill Lynch fund manager survey also shows
that fund managers are less cautious on emerging markets. Only
13% took underweight positions as opposed to 31% in March.
3 Emerging Market Stocks to Buy Now
The troubles seem to be making less impact on the markets now
as the currencies are gaining strength and the funds are
witnessing inflows. So, it is an ideal time for investors to add
some emerging market stocks. We have screened for stocks that
have top Zacks Rank, Price/Sales ratio of less than 1 and PE (F1)
lower than 20.
Tata Motors Limited
) is the largest automobile company in India. It is also the
fifth largest truck manufacturer and the fourth largest bus
manufacturer in the world. It also provides automotive solutions.
Commercial and passenger vehicles are also sold in Europe,
Africa, the Middle East, South East Asia, South Asia, Russia and
Tata Motors holds a Zacks Rank #1 (Strong Buy). The forward
price-to-earnings ratio (P/E) for the current financial year (F1)
is 8.72 and it has a Price/Sales ratio of 0.64. The current year
growth estimate stands at 26.6% as compared to industry's growth
estimate of 11.1%.
JinkoSolar Holding Co., Ltd.
) engages in the design, developing, producing and marketing of
photovoltaic (PV) products in China and internationally.
This company sells its solar modules to distributers, project
developers, system integrators, and other players in the solar
JinkoSolar holds a Zacks Rank #2 (Buy).
The forward price-to-earnings ratio (P/E) for the current
financial year (F1) is 8.17 and it has a Price/Sales ratio of
0.72. The current year growth estimate stands at 110.7% as
compared to industry's growth estimate of 32.5%.
) is a Brazilian developer of jets and turboprop aircrafts.
Embraer sells them to the defense aviation markets Brazil, North
America, Latin America, the Asia Pacific, Europe, and also
internationally. The company is also engaged in research and
development of military defense and security aircraft.
Embraer holds a Zacks Rank #2 (Buy). The forward
price-to-earnings ratio (P/E) for the current financial year (F1)
is 14.55 and it has a Price/Sales ratio of 0.97.
EMBRAER AIR-ADR (ERJ): Free Stock Analysis
ISHARS-BRAZIL (EWZ): ETF Research Reports
JINKOSOLAR HLDG (JKS): Free Stock Analysis
MORGAN STANLEY (MS): Free Stock Analysis
TATA MOTORS-ADR (TTM): Free Stock Analysis
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