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Market Perspectives - January 2018


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Market Perspectives - January 2018

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Market Perspectives - January 2018

  1. 1. Market Perspective – January 2018 Experience Insight Impact Overview: After many years of underperformance, Emerging Markets finally exhibited strong returns in 2017. Given a variety of factors, the rally may have more upside. This month we examine Emerging Markets and the role they may play as a portion of a diversified portfolio. 1
  2. 2. Emerging Markets Defined Experience Insight Impact • Emerging Markets (EM) are nations which have some characteristics of developed markets, but lack the stability to be considered developed. • Key components of EM are a shift to a more steady political system, a more stable economy (and currency), and a rising middle class coupled with generally improving standards of living. • Investors should operate under the assumption that EM stocks are going to exhibit more volatility than Developed Markets. • The chart at the right lists the largest components of one of the major EM indices (represented here by one of the oldest ETFs in the space, EEM). 2 Source: Bloomberg
  3. 3. Emerging Markets’ Historical Performance Experience Insight Impact For the past decade, Emerging Markets performed poorly, rising above the 2008 highs only during the past 12 months. As you can see from the chart above, from 2008 until the middle of 2017, EM stocks were actually negative. 3 Source: Bloomberg
  4. 4. Emerging Markets Look To Be In Earlier Parts of the Cycle Experience Insight Impact 4 • The chart on the right shows several economic indicators (GDP, investment, industrial production and imports), which are still early in the EM business cycle. • If history serves as a guide, we can expect these growth rates to rise and grow closer to trend over time vs. Developed Markets (DM).
  5. 5. Emerging Market Stocks Are Likely Rising Due To Earnings Growth Experience Insight Impact 5 The white line in the chart above shows the trailing 12 month earnings of the MSCI EM index, while the blue line represents forward estimates. If earnings continue to outperform, markets may follow suit. Source: Bloomberg
  6. 6. Emerging Market Stocks Still Very Inexpensive Relative to the Long-Term Averages Experience Insight Impact 6 When EM stocks began their rally in January 2016, they traded at just .67x the relative valuation of the S&P 500. After President Trump was elected, and more recently, the ratio low was revisited. In order to rise to long-term averages, EM stocks would have to rally substantially. Source: Bloomberg
  7. 7. Market Perspective – January 2018 Experience Insight Impact Conclusion: While there is little doubt that Emerging Markets will remain volatile in price over time, the overall conditions still appear favorable for maintaining an allocation to this segment of the investment universe. As we progress through 2018, and more clues become apparent as to the recovery in these markets, we remain flexible and will adjust as necessary. 7
  8. 8. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 8