I'm sure Bloomberg has shown this chart in the past in its regularly scheduled programming. But digging into the fundamentals, things become even more eye opening.
A quick look at fundamentals, obviously EM is cheap - I picked a few indices that generally people put in "EM" and "DM" buckets. For the most part, DM is expensive. For the most part, EM feels cheap. Valuation below - (by the way, Eurostoxx was used for Europe, FYI)
I'm sure we've all seen US equity and growth divergence charts on Zerohedge.com. I wanted to dig deeper myself, to look at the differences between EM (MXEF as the proxy) vs DM (US/SPX as the proxy) in terms of growth vs equity performance.
Despite EM outgrowing DM - the underperformance has been palpable.
Please mind the gap. The divergence has been evident, yet it seems to be bottoming. I hate to bring everything back to Trump but I think that will be the catalyst.
Remember from the last post, trades go in and out of favor. The EM trade has been out of favor for 7 years. The Trump trade has been 7 weeks. Both of which might be making a resurgence soon.
Yo Gotti knows it's going down in the DM.
But, but, but, but...Protectionism and other Trump stuff!
Well, interestingly, after all the populist rhetoric, EM equities have actually outperformed DM in 2017 YTD. EM currencies have been ripping as well against the dollar during the same period.
There could be a few reasons why that's happened. Inflationary pressures can be good for EM exporters and can temporarily soften any blows from protectionism. Additionally, the potential lack of access to the US and other DM can lead to meaningful reform in emerging economies. The world runs on unintended consequences.
Trump's actions can unintentionally manifest as incentives for EM to take on reforms that will drive wage growth, productivity growth and domestic consumption that ultimately leads to economic resilience.
A number of EMs are in crisis/post-crisis mode, where their domestic issues are being aggressively addressed (Brazil, Turkey, Argentina, and Russia come to mind). That seems to be a sign for contrarian investors to start building stakes. Although I like most EMs, a caveat must be noted.
There should be a distinction made between good and bad EMs. Zuma's debacle that is South Africa - bad EM. Real reform and progress made in Argentina - good EM.
As always, good luck out there.