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Emerging Markets – The Best Opportunity In Over Two Decades?

10 November 2020 By Mircea Vasiu

Yesterday may have well been one of the decisive days in the battle against the coronavirus pandemic. For the first time in the Western world, data of a potential vaccine shows efficacy of over 90% in preventing the infection with the COVID-19. 

The news, if confirmed by future data, exceeds all optimistic scenarios. In comparison, the influenza vaccine has an efficacy between 40%-60%. It means that for a society, it will be far easier to reach herd immunity at such a high rate.

Needless to say, the news created exuberance on the stock market. To start with, the Dow Jones surged to a new all-time high above 30,000 points. Ibex, the Spanish index, had the best day in over a decade. Banks, airlines, cruisers were one of the best performers of the day.

However, not all equities benefited from the news. The “stay at home” stocks, especially tech stocks, had a negative day. If we talk back to normal sooner than most people believed possible, is it wise to also consider emerging markets equities and currencies?

Emerging Markets Equities – An Ongoing Disappointment

Emerging markets equities have long been chased for their potential return. The only catch for an investor is to find the right allocation ratio that protects the portfolio against underperformance.

The pandemic made it so that the tech sector in the United States trades at unimaginable valuations. For example, one of the companies negatively impacted by the COVID-19 news was Zoom. It trades at 103x sales in comparison to Disney, which trades at 3x sales. Hence, on positive vaccine news, Zoom and other tech stocks declined.

As such, some investors may decide to reallocate parts of their portfolios, and emerging markets might offer the best answer. Emerging markets value stocks underperformed in the last seven years. A cheap asset class, despite strong fundamentals, may appeal to some investors willing to rotate parts of their portfolio. In fact, a comparison between emerging markets value stock and the S&P500 reveals similar conditions as in 1999, during the doc.com bubble.

Emerging markets’ currencies also are the cheapest they have been in over two decades. The Turkish Lira gained the most against the USD yesterday after the change of the central bank’s governor over the weekend. But emerging markets currencies differ from equities and seem far riskier.

One thing is worth considering. Investors willing to allocate parts of their portfolios to emerging markets must consider that the U.S. is in a bubble today. If not, it may be just too early to rotate into emerging markets yet.