Trend Shift Underway for Emerging Markets …
The American people have spoken … now it’s up to our elected leaders to follow through in addressing the many challenges facing the U.S. economy.
And as my colleague, Tom Essaye, wrote in his Money and Markets columnyesterday, next up is the dreaded fiscal cliff looming dead ahead!
Speculation has been growing that some sort of post-election bargain could be struck to extend some, if not all, of the existing tax rates and postpone automatic spending cuts that could pack the punch of an economic hurricane on January 1, 2013.
The outcome of this looming uncertainty will have a profound impact on our economy and your wealth in 2013 and beyond. But this high degree of uncertainty is nothing new …
As you can see in the chart below, the degree of economic uncertainty today is not much less than the record levels reached during the credit crisis and its aftermath.
Click the chart for a larger view.
We are truly living through uncertain times.
But now that the election campaigning is over, hopefully we can gain more clarity about the path our policies will take and how our leaders can resolve the fiscal cliff. If so, it would go a long way toward diffusing the high degree of uncertainty impacting markets.
Meanwhile, half a world away, emerging market countries, particularly in Asia, find themselves in a very different phase of the economic cycle …
An Emerging Uptrend
Developing economies face no fiscal cliff … and have no government debt crisis to resolve. In fact, recent economic data tells me that many Asian economies … from China to Singapore to South Korea … may have already bottomed with growth poised to accelerate again.
Stock markets in the developing world are confirming this by bucking the recent correction in U.S. and European stocks — with emerging market share prices surging higher.
And it looks to me like the emerging market uptrend has a lot further to run, despite persistent uncertainty here at home.
Take a look at the chart below, and you’ll see how emerging stock markets have fared vs. the S&P 500 Index over the last several months.
Click the chart for a larger view.
The MSCI Emerging Market Index is up more than 5.5 percent since September 1, while the U.S. blue chip index is essentially flat — having given up all of the post-QE3 gains.
This is powerful evidence that a sustainable, secular shift in trend is underway. Another reason this rally should be sustainable is the fact that …
Emerging Markets Are Packed Full
of Compelling Value!
The MSCI Emerging Market Index trades at just 10 times 2013 earnings estimates, compared to 12.4 for the S&P 500. Right off the bat you’re getting roughly a 20 percent valuation discount in emerging markets, but it gets even better …
Emerging market profits are growing much faster — expanding 9.2 percent this year — and should surge 14.2 percent in 2013, according to estimates.
Meanwhile, S&P 500 profits are forecast to grow just 5 percent this year and 10.6 percent in 2013, which may prove difficult following disappointing third-quarter results.
Of course plenty of uncertainties remain that could derail global markets. But if we manage to avoid these “disaster scenarios,” then select emerging markets may be the best place to consider investing right now for a sizeable relief rally.
Good investing,
Mike Burnick
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