Emerging-market stocks on cusp of reaching highest level since 2018

Emerging-market stocks are on the cusp of reaching their highest level since 2018, and all they need may be more evidence of further growth in China, stable earnings and signs of more dollar weakness to take them there.

The MSCI Emerging Markets Index has gained more than 50 per cent since reaching this year’s low in March. At 1,137.75, it’s less than 15 points away from surpassing this year’s peak reached in January, and eclipsing that level would take the benchmark to highest since mid-2018. Strength in Chinese equities — the biggest component on the equity gauge — and earnings upgrades across developing economies that are beating the rest of the world are helping propel the gains.

Developing-nation stocks have made a comeback in October, amid optimism over vaccine advances and as signs of progress in US stimulus talks sent the dollar lower. The equity rally has been particularly prominent in Asia, where economic data show a continued recovery from the pandemic. China’s stock market capitalization this month topped $10 trillion for the first time since 2015 as the value of stocks among the 26 emerging-market nations climbed to a record $22.3 trillion.

“China has led emerging-market equity growth, but it goes beyond China, especially if we see more evidence of the dollar peaking,” said Frank Benzimra, head of Asian equity strategy with Societe Generale SA in Hong Kong. “Asia foreign exchange has also been more supportive for equities in the recent months. Bear in mind than more than 80 per cent of emerging markets consist of Asia, where, especially in east Asia, the virus has been more successfully contained and the recovery quicker to happen.” 

Equity analysts have boosted the average profit forecast for companies in the gauge by more than 12 per cent in dollar terms since the low in June, beating the same metric for the S&P 500 Index, and twice as fast as earnings-estimate upgrades in Europe.

Volatility has fallen from a high in March, and hedging prices for the iShares MSCI Emerging Markets exchange-traded fund are below the annual average. The cost of bearish three-month options on the security fell to its lowest level since February relative to bullish contracts, according to data compiled by Bloomberg.