Emerging-Markets Stocks Took The Lead Last Week

Emerging-markets equities enjoyed a solid rise last week among the major asset classes, based on a set of proxy ETFs. Vanguard Emerging Markets Stock (VWO) posted a solid 4.5% total return for the five days of trading through Nov. 20, edging out the number-two performer for the week, US real estate investment trusts (REITS), based on Vanguard REIT (VNQ).

Last week’s boost for emerging-markets stocks inspires hope that a turnaround for this long-battered sector may be unfolding. Perhaps, but there are still formidable head winds to consider. “Emerging markets are under pressure as the US raising interest rates in December is a done deal,” Kenix Lai, a foreign-exchange analyst at Bank of East Asia, tells Bloomberg. “The dollar will get stronger while China’s economic fundamentals haven’t shown any signs of improvement.”

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Meanwhile, momentum for stocks in emerging markets overall for a US-dollar-based investor continues to reflect a bearish hue. Although last week’s rally pushed VWO slightly above its 50-day moving average, the 50-day average remains well below its 200-day counterpart. Valuation metrics for this slice of the world’s equity markets may look attractive, but it’s not obvious that a sustained rally is currently underway.

Meanwhile, the bear market in commodities generally rolls on, which is another factor weighing on emerging markets that rely on firm pricing for raw-materials exports. The broadly defined iPath Bloomberg Commodity ETN (DJP) slumped again last week, dipping 1.7%–the biggest weekly loser among the major asset classes.

Commodities remain the red-ink leader in the trailing one-year return column too. Indeed, DJP is now lower by more than a third for the 12 months through last Friday (Nov. 20). That’s a long way from the one-year performance leader: US REITs (VNQ), which is ahead by 4.7% on a total-return basis.

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The prospect of rising interest rates in the US—the Fed is currently expected to start squeezing monetary policy next month—is considered a negative for the relatively high-yielding REIT sector. But as the FT reports, some real estate executives say the outlook for higher interest rates may not be as troubling as some analysts expect. Property-investor Brookfield Asset Management, for instance, recently explained in a letter to shareholders:

“We have been running our business with the expectation that interest rates will increase, particularly in the United States; in fact, we welcome this. Interest rates will rise because the economy is improving and that is positive for business,” Brookfield Asset Management told its shareholders at the end of the second quarter.

“Returns may be slightly less going forward, but cap rates (the inverse of the return) have been stubbornly high relative to interest rates for one specific reason . . . that everyone knew interest rates were going up.” At the same time though, the letter noted, “we have been net sellers of assets in the US, given the robust amounts of capital available to investors”.

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