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Emerging market stocks may be recovering, but cash-rich investors would be better off avoiding the risks that still abound in developing nations. Barclays Plc is telling its high net worth clients in emerging markets to invest in US equities instead, despite the S&P 500’s breakneck rally.
“Countries from India to Brazil and Russia have become the epicentre of the coronavirus pandemic, with their economies grinding to a halt and governments struggling to provide adequate stimulus. Their stretched Budgets pale in comparison to the virtually unlimited support being provided by the Federal Reserve and the US administration,” Barclays Private Bank’s Salman Haider said.
“Compared to the US, emerging market economies appear more vulnerable,” said Haider, the London-based managing director and head of global growth markets. “Their central banks have less room to manoeuvre, their governments may not be able to provide unlimited support, and equity markets, given their sector mix, can be more challenged by an economic slowdown,” he added.
At a growth disadvantage
The inability of emerging markets to spend their way out of the crisis may put them at a growth disadvantage against the US, whose fiscal support package accounts for at least 12 per cent of gross domestic product (GDP). That may also halt a nascent rebound in stocks of developing nations, which have underperformed their American peers since the start of the trade war in 2018.
Even after a 33 per cent bounce-back since late March when a panic sell-off subsided, emerging market stocks are still down 10 per cent for the year, while the S&P 500 has surged 45 per cent from the years lows. They now trade at a 36 per cent discount to their US peers, compared with 25 per cent three months ago. Futures traders have pruned their net long positions to the lowest level since January 2016, according to Commodity Futures Trading Commission data.
The caution reflects the deteriorating economic outlook for the developing world. Economists project no growth this year, with major economies including India, South Africa, Mexico, Brazil and Russia slated for recessions.
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