Emerging-market equities rebounded last week, posting the first weekly gain since early April. The 2.8% total return for the Vanguard Emerging Market ETF (VWO) for the five trading days through May 27 also marked the strongest performance for the major asset classes last week, based on a set of proxy ETFs.
Meantime, foreign high-yield bonds lost the most ground last week. The iShares International High Yield Bond ETF (HYXU) fell 1.2%, posting its second weekly decline over the past three weeks.
An ETF-based version of the Global Markets Index (GMI.F), an investable, unmanaged benchmark that holds all the major asset classes in market-value weights, increased 1.5% last week.
For the trailing one-year return, US REITs continue to hold the top-spot among the major asset classes. The Vanguard REIT ETF (VNQ) is higher by 9.1% in total-return terms over the past 12 months (blue dot at left in chart below). Meanwhile, emerging-market stocks, despite last week’s gain, are still dead last among the major asset classes over the past year. VWO shed nearly 20% for the trailing one-year period, edging out the 12-month loss for broadly defined commodities (DJP), the second-biggest loser.
Note, too, that the current one-year return for emerging-market stocks is unusually weak relative to rolling one-returns for VWO over the past three years. This can be seen in the chart above, which shows the current one-year performance for VWO via the blue dot, which is well below the interquartile range (gray box) for the fund’s 12-month performances since 2013. (The horizontal black bars within the gray boxes mark the median return for the sample period for the funds.)
The generally weak performance for emerging market stocks in recent history is prompting some analysts to question the long-term outlook for this slice of global equities.
“Emerging market equities have been in a downtrend since 2011, characterized by bear market rallies, which have been sparked by valuations and sentiment hitting extreme levels and economic data bottoming,” Patrick Cadell, manager of the Liontrust Global Fund, told CNBC. “While we believe a return to earnings growth is possible in some markets, conditions in others are not conducive to an improvement in earnings.”
The question is whether such pessimism lays the groundwork for relatively attractive returns going forward? In other words, will reversion to the mean come to rescue at some point? On the basis of last week’s encouraging bounce, there may be a glimmer of hope.
Skeptics note, however, that the prospect of more rates hikes by the Federal Reserve will keep a lid on emerging-market stocks for the near term. “There is money looking to go into emerging markets and there is a certain appetite for risk, but it is cautious and most certainly not gung-ho,” Paul Fage, senior emerging markets strategist at TD Securities, told Reuters last week.