The case for emerging-market stocks

YOU KNOW by now, if you’ve been paying attention, that the coronavirus pandemic is, if not a turning point in history, then the midwife to profound change or, at the very least, an opportunity for a bit of a rethink. Everything has changed—except, perhaps, minds. Those who expected China (or the European Union or shareholder capitalism) to blow up are now more convinced it will. Believers in globalisation’s retreat, or inflation’s comeback, have fewer doubts.

And if you were chary of emerging markets you might be more so now. In March, when there was a mad scramble for cash, the cash everyone wanted was dollars. When the dollar gets bid up, it hurts emerging markets. If inflation returns, meanwhile, it will surely show up first in the developing world.

Yet if these vices seem more apparent, so does the virtue of diversification. The ideal diversifier is not just something other than what you own, but something that contrasts with it. The typical portfolio is rich in dollar assets—in Treasuries and the leading American shares. It needs a counterweight, an anti-dollar trade. A benchmark basket of emerging-market stocks is a good one.

It helps that such stocks are cheap. Valuations based on company earnings are often misleading at the start of recessions. Recent earnings figures flatter the appraisal; forward-...



via The Economist: Finance and economics Business Feeds

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