Investors may be ready to abandon emerging markets, but as Russ discusses, the potential is there for a sizeable rebound.
U.S. technology is once again ascendant. Since the fall of 2016, the S&P 500 Technology Sector Index is up nearly 70%; the tech sector now accounts for more than 25% of the S&P 500 market capitalization.
Despite the strength of the recent rally, tech enthusiasts will recall a long, long period of unpopularity. After peaking in early 2000, the tech sector lost more than 80% of its value. It then took 17 years until the sector reclaimed its 2000 peak.
Investors in emerging market (EM) stocks should keep that history in mind as they go through a similar, albeit less prolonged drought. The MSCI Emerging Markets Index is trading at approximately the same level as it did in early 2010.
Value, or the lack thereof, played a part
Valuations in emerging markets never approached the Olympian heights that tech stocks traded at in the late 1990s. That said, valuations have played a part in emerging markets’ struggles.
Since coming out of their own financial crisis in late 1990s, emerging market stocks have tended to trade in a well-defined range versus developed markets: a 45% discount to a 10% premium (based on price-to-book). Periods when EM stocks traded at a premium, such as late 2007 and 2010, turned out to be market tops. Interestingly, EM’s recent 20% drop was not proceeded by egregious valuations. In January, EM stocks were trading at approximately 1.9 times x book, a 23% discount to the MSCI World Index.