Relief in US-China trade tensions, coupled with central-bank trends and fiscal expansion, pave path for advance
Emerging-market equities are well-placed to outperform other markets in the coming months, according to UBS Wealth Management.
In a newly published report, the global firm noted that EM stocks returned 19% last year as news of rising political risks, slowing GDP growth, and increasing monetary policy support washed over financial markets. That performance put the asset class ahead of high-grade bonds (9%) but behind developed-market stocks (28.5%)
Better EM stock performance is in the cards this year. As wide as the EM-DM performance gap was, it had actually been narrowed somewhat in December thanks partly to progress on the US-China Phase 1 deal.
“While the deal is not yet signed, tariffs have effectively been lowered for the first time since the trade dispute started,” the report said, noting outperformance among most U.S.-China trade-related assets over the past month. “Another escalation in tensions is unlikely, in our view, which should provide more scope for EM equities to move higher.”
The U.S.-China trade conflict hit emerging markets hard, with EM earnings forecasts last year being downgraded by more than 20% — earnings grew only 1% during the year — after March 2018, when U.S. tariffs that targeted Chines products were first introduced.
2019 outflows from EM equities have left positioning on the assets light, UBS said. A recent stabilization in PMI numbers indicates a possible re-strengthening of EM stocks, though the firm expects that corroborating hard data in China would be needed before investors flock back.
“With some tariffs rolled back and visibility about the trade conflict and economic data improving, EM and especially emerging Asia profit growth is set to recover,” the report said. “Any further positive trade developments would likely boost EPS in China, Korea and Taiwan, which account for almost 60% of MSCI EM and were responsible for the earnings downgrades in the index last year.”
UBS noted that Aside from the absence of higher tariffs, profit growth would depend on the anticipated re-stocking in the IT hardware supply chains after several previous quarters that saw declines in inventories. Takeoff in 5G, with faster adoption being pushed by China, should increase volumes and set the stage for a return to double-digit growth rates in markets like South Korea and Taiwan.