as part of our
While the United States has rallied, emerging markets are
tanking. And a dip over the last few days has put the MSCI Emerging
Markets Index in the red.
Over the last 12 months, U.S. markets have rallied 10%. Emerging
markets, on the other hand, have been down as much as 16% - and
have barely fought back to breakeven.
The culprit? Some attribute it to earnings. The latest round of
reports has shown an unusual number of the (more dependable)
foreign companies reporting lackluster earnings and guidance.
And it's not just small, risky stocks. Poland's largest phone
) - a respectable dividend payer - plunged 45%. Mega-cap company,
), is down nearly 9% since its earnings report.
So it's true that earnings have, indeed, led to the sharp drop
over the last week. But emerging markets have underperformed for
the last year. Meaning there's a bigger issue here.
Namely that America is an attractive investment again.
Think about what's driven investors for the last few years.
First, there was a fear of systemic risk. Markets were dominated by
the risk-on/risk-off trade, and Treasuries were snapped up by
Since this drove down Treasury rates, investors went on a chase
for yield, plowing money into emerging markets - especially
emerging markets debt. Take a look at the
WisdomTree Emerging Markets Local Debt Fund
) to see what I mean:
Ultimately, a fear of risk led investors to risky emerging
markets investments. It sounds strange. But it actually makes
sense, since the trend occurred during a time of increased
pessimism about the western financial system.
There was the U.S. financial crisis, the debt ceiling debates,
the election, potential European defaults, the euro crisis, LIBOR
scandal… The list goes on.
Those fears made the risks attached to emerging markets seem
tame and understandable.
Recall the examples of big declines I mentioned above - the
Polish phone company and Gazprom. Both were big healthy dividend
payers. That's indicative of the kind of stock that these yield
chasers would buy.
But that's all changing now. Confidence is returning to the
United States in a big way. Money is moving out of Treasuries and
emerging markets, and flowing into U.S. stocks. And
it's happening in a way that will make this year a
It also means that we'll see a continued struggle for emerging
markets, at least in the short term.
When you combine this sort of risk cycle with a few quarters of
slow earnings, emerging markets will be undervalued in short
This prediction will be revised as new data comes in, but I
suspect that in 9 to 12 months, it will be time to buy emerging
markets on the cheap.
In the meantime, the good news is that falling
emerging markets stocks
translate into rising U.S. stocks for now. So enjoy.