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Emerging Markets Will Be Strongly Bullish In 2018

Emerging markets will be the most bullish stocks for 2018, that is one of InvestingHaven’s most explicit market calls.

Interestingly, it is not only InvestingHaven’s research team coming to that conclusion, but also some other financial analysts.

According to Barron’s, UBS has become bullish on emerging market stocks, presumably for 2018 and beyond. UBS says that emerging markets’ reaction to Fed rate hikes should remain benign if those hikes are driven by growth and not uncontrolled inflation. Investors should maintain a balanced, rather than a negative, view of emerging market assets.

This is interesting as InvestingHaven’s research team was among the first (a lonely voice) to note the outperformance of emerging markets after (because of?) the U.S. Fed interest rate hike, as released in this article back in February emerging markets bullish and break out after U.S. Fed rate hike.

Also, Bank of America (BofA) came out last week to end their 5-year long negative stance against emerging markets. BofA is now bullish emerging markets because “valuations in both Asia ex-Japan and emerging markets look attractive on both a price-to-earnings and a price-to-book basis, not just on their own, but also when compared with global valuations.”

Moreover, according to BofA, “the anchoring effect of five-year’s underperformance is a powerful downer. We think that the balance of risks is exactly the opposite. Investors should get out of the bunker and off the fence and make a longer-term bullish commitment.”

How much clearer can the message be?

The Templeton Emerging Markets Group believes that fundamentals in emerging countries look much better than their currency prices are reflecting. According to Frontera News, “the Group also expects inflation to fall in countries like Brazil, Russia, Colombia and Nigeria, allowing their respective central banks to take an accommodative stance with their monetary policies which can benefit both economic activity as well as local equities.” That is another bullish emerging markets call.

Fortune.com highlights the difference in view between fund managers and rating agencies. Fund managers appear to be quite consistently bullish on emerging markets for 2018 and beyond, while rating agencies are neutral to negative.

BlackRock, the world’s largest asset manager is expecting to reap solid gains from all emerging market asset classes, especially bonds, Jeff Rosenberg said. Other global fund managers also see a rebound on the horizon.

However, credit ratings agencies like S&P Global, Moody’s Investors Service and Fitch Ratings have lowered positive credit outlooks and written even more negative outlooks for emerging markets. Rating agencies highlight the risk of capital flight, potential weakness in the banking sector, and worries about geopolitical risk and energy companies not being able to adjust to a longer-term trend of lower prices for oil and gas.

Emerging markets bullish in 2018 and beyond

At InvestingHaven, we see three fundamental reasons why emerging markets will be bullish in 2018 and beyond.

First, emerging markets have suffered for too long. The economic and market cycle move from positive to negative and back.

Second, in relative terms, emerging markets still have significant growth potential in the middle class, infrastructure, consumption, etc. Economically, there is a reason why they are ’emerging’ and not yet ‘developed.’

Third, emerging stock markets have consolidated for an unusually long period, as seen on the chart below. The longer the consolidation period on a stock chart, the stronger the trend afterwards.

Because of these reasons, InvestingHaven says emerging markets are bullish in 2018 and beyond. That is in line with our emerging markets forecast for 2017. We have also tipped the top 5 emerging markets to buy in 2018.

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