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April 16, 2022, 10:14 a.m. EDT

Emerging markets stocks with a host of tailwinds are poised to outperform U.S. equities

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By Michael Brush

Investors have plowed a lot of money into emerging markets in April.

They added more than they have at any time in the past 10 weeks, says Bank of America. This continues a trend that started in late 2020.

Is this folly? Or will emerging markets (EM) outperform this year and beyond?

It’s the latter, says Neal Dihora, who helps manage the Wasatch Emerging Markets Select Investor Fund  /zigman2/quotes/203331026/realtime WAESX +3.39% alongside lead manager Ajay Krishnan, who has been at the helm for over nine years.

Sure, they have a bias. They run an EM fund. But their remarkable record tells me they are worth listening to. The Wasatch fund beats its Morningstar diversified emerging markets category by 9 to 13 percentage points annualized over the past three to five years, according to Morningstar Direct.

Besides, they’re not the only ones bullish on EM now. We’ll get to the investing lessons we can borrow from the Wasatch team on how to beat the markets, and several favorite EM names. But first, here’s why EM may outperform this year and beyond.

The dollar will lose its luster

If international tensions ease over the next few months, the dollar will lose some of its safe haven status. This will have investment money flowing out of the dollar into other parts of the world, supporting EM stocks, says Jim Paulsen, the chief equity strategist at Leuthold group. He favors EM outside of China, and this makes sense because a lot of companies are moving supply chains to other EM nations.

EM will benefit from mega trends

Dihora cites five so-called mega trends: population growth; “financialization,” or the greater use of consumer credit; digitalization, meaning greater use of the internet for things like shopping and banking; and industrialization.

This means the buildout of supply chains in EM countries including Vietnam, Indonesia, Malaysia, Brazil and Argentina, among others.

Goldman Sachs agrees. The bank has singled out EM for outperformance.

“An active EM equity strategy may have the potential to outperform a U.S. one over the next decade as EM populations grow and innovation expands,” says the investment bank.

Inflation helps emerging markets

Many EM economies are commodity-based. A sustained rise in commodity prices will support gains in gross domestic product (GDP), improving the tone of business for companies throughout their economies.

Emerging markets look relatively cheap

While investors agonize over relatively high valuations in the U.S. stock market despite weakness this year, EM looks about as cheap as it has been in the past 20 years, says Goldman Sachs.

/zigman2/quotes/203331026/realtime
US : U.S.: Nasdaq
$ 14.93
+0.49 +3.39%
Volume: 0.00
June 24, 2022
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