Market Perspectives - January 2018

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.
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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).
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Source: Bloomberg

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.
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Source: Bloomberg

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. 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. 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. 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.
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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.
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