During the last three months, we have seen emerging markets starting to underperform the S&P 500. This has led to a lot of pundits bashing emerging markets and predicting big drops of 20 percent to 30 percent.
Others have interpreted this underperformance as a signal that something is seriously wrong with the world economy because emerging markets don’t confirm the new highs in the American equity indexes. Momentum hedge funds have all tended to rush for the exits at the same time and cause a drop in these markets amid a strong rally in the S&P 500.
I see the current phenomena as a normal correction in markets that had vastly outperformed the S&P 500 during the last two years. Valuations in some sectors got ahead of the fundamentals and it’s normal for investors to take profits and looks for opportunities with greater potential.
Sectors in the U.S. markets are currently undervalued and there is a lot of retail money on the sidelines that had just started to return to equity funds after getting scared away by the market crash of May 2010.
Coupled with this, we have seen macroeconomic data starting to improve in the United States, making it, for the moment, more attractive to investors than emerging markets.
All of this is beneficial for American indexes in the short term but let’s remember that the quality fundamentals and growth prospects are still in emerging markets and not in the United States.
In the long run, I continue to see emerging markets outperforming U.S. equity indexes. American companies with powerful brands and quality products that have operations worldwide should also be great performers.
An immense part of the “economic recovery” that the United States is witnessing is a byproduct of the massive fiscal deficits that the government is generating to stimulate the economy. The estimated budget deficit for this year amounts to $1.65 trillion, a historic figure. All this debt will add to the massive $14 trillion public debt (97 percent of GDP) the U.S. faces.
Using debt to spend and stimulate in the short term isn’t a long-term solution to growth. Sooner or later, the market will enforce austerity and budget cuts will quickly erase any progress made in macroeconomic indicators.
To this equation, add the $112 trillion in unfunded liabilities the government has to finance. These obligations total more than a million dollars per U.S. citizen. Sorry, but long-term fundamentals and growth prospects aren’t the brightest in the United States.
On the other hand, in 2011 countries such as Chile are expected to grow 6.1 percent amid strong internal demand and investments. Chile doesn’t need massive fiscal deficits to grow its economy and until recently has produced fiscal surpluses instead of deficits. The government is taking measures to make this country a Latin American hub of investment and human capital to spur innovation and growth.
You can find out more here: http://www.startupchile.org.
Chile’s neighbor, Peru, is expected to grow around 7 percent, also based on strong domestic demand and foreign investment.
Bottom line: You shouldn’t get distracted by normal market moves and lose sight of the strong fundamentals that will continue to power emerging markets higher. The current drop in emerging markets is an opportunity to enter and diversify your investments outside the United States and the dollar.
About the Author: Victor Riesco
Victor Riesco, a financial analyst and trader in Santiago, Chile, works as an independent adviser and educator and operates a brokerage and trading business for local investors. Click Here
to read more of his articles.
© 2017 Newsmax Finance. All rights reserved.