A New Year, same old trends? with Ivaylo Ivanov

Emerging markets have notably underperformed US stocks for the past 10 years. Maybe it’s about time for them to shine? We have been hearing this same forecast every January for the past few years. Emerging market stocks would start the year on a high note only to see enthusiasm fade at some point between March and May. They came like lions, they left like lambs. 

The situation was completely different in the mid-2000s. Between 2003 and 2007, the emerging market ETF, EEM went up 370% (yes, that is not a typo). A non-leveraged ETF more than quadrupled, while the S&P 500 went up 70% in the same period of time. The roles reversed in the following twelve years. 

“Emerging market stocks would start the year on a high note only to see enthusiasm fade at some point between March and May. They came like lions, they left like lambs”

 

Will this year be any different?

This year has similarly started with a big jump in emerging market stocks. The China internet ETF KWEB gained more than 6% on the first trading day of 2020. The more wide-encompassing emerging market ETF, EEM is also off to a good start. Can this be the year of emerging market stocks? 

The mid-2000 growth of emerging markets was fuelled by high inflation and skyrocketing commodity prices. Today, we are still far from anything similar. Central banks around the world have cut their overnight interest rates to zero, or almost zero, hoping that this will spur growth. The results have been underwhelming. People haven’t been more aggressive in their investing. They have been saving more. 

The size of both corporate and national debt has ballooned to record levels. We have reached a point where the world cannot afford a big spike in interest rates. Obviously, this situation won’t remain forever, but it can also last a lot longer than anyone who bet against it can remain solvent.

Low growth, low inflation, record debt – the odds are that technology will continue to outperform basic materials in 2020. Therefore, developed markets may still outpace emerging markets.

“Low growth, low inflation, record debt – the odds are that technology will continue to outperform basic materials in 2020. Therefore, developed markets may still outpace emerging markets”

 

About the author

Ivaylo Ivanov is a portfolio manager at Zor Capital and the founder of Ivanhoff Capital and ivanhoff.com. He has written numerous books on trading, including Top 10 Trading Setups – How to Find Them, How to Trade Them, How to Make Money with Them and The Five Secrets to Highly Profitable Swing Trading.