In Covid-hit world, emerging market stocks are a haven for global investors

The MSCI Emerging Markets Index is up about 3.5% this month, compared with a 1.4% slump in the MSCI All-Country World Index

With Treasuries, the yen and gold failing to live up to their usual haven potential, it seems the traditional risk-on vehicle of choice -- emerging-market stocks -- has stepped in to take up the mantle.

A benchmark of developing-nation shares has leaped higher as equity markets from Europe to the US reel from the resurgent coronavirus and pre-election jitters. The MSCI Emerging Markets Index is up about 3.5 per cent this month, compared with a 1.4 per cent slump in the MSCI All-Country World Index. The former has even broken out of a 2 1/2-year relative downtrend.

The gauge has now outperformed the S&P 500 Index during three major global risk asset sell-offs over the last five months by an average of 6 per cent, according to Goldman Sachs Group Inc. strategists Caesar Maasry and Ron Gray. The fact that investors have sold down EM exposure this year and are likely underweight the asset class could explain some of this defensiveness, they wrote in a note Thursday.

“Rather than viewing emerging-market defensiveness as building ‘catch down’ potential, we think underpositioning of EM exposures explains their relative resiliency,” the pair wrote. “This observation furthers our conviction that risk/reward appears attractive across EM pro-cyclical trades when considering a view through year-end.”

A growing number of investors are warming to developing-nation stocks as the global economy recovers from the worst of the coronavirus pandemic. The rapid recovery seen in China and the weaker dollar have also encouraged the bulls. UBS Global Wealth Management said EM assets could benefit from a Democratic sweep of the U.S. elections next week, while BNP Paribas said next year may be a “sweet spot” for the asset class.

Skies Clearing for Emerging Stocks to Reach Highest Since 2018

“Emerging market equities and local bonds may be incrementally insulated from global shocks in the near term and may benefit from a return of flows when looking into 2021,” wrote the strategists at Goldman. “But our conviction rests upon the fundamental outlook of a strong growth recovery during that period.”