Emerging-market equity investors are signaling they’re done running for safety and are hungry for risk.
Stocks in developing nations have added $1.1 trillion in the past two weeks as anxiety about global interest rates gives way to optimism the Federal Reserve has reached the end of its tightening phase. What’s more, growth stocks are heading for their biggest three-day gain against the more sedate value stocks since March.
That means money managers are willing to own shares of companies with faster revenue growth but also expensive valuations — such as e-commerce providers and electric-vehicle makers — as they may yield outsized returns in a less hawkish policy environment. That’s a shift from most of the year, when mature companies with cheaper price-earnings ratios were favored, given their tendency to limit losses in a selloff.
“The recent outperformance of growth stocks came on the back of Fed officials signaling that the US central bank does not need to increase interest rates any further,” said Malcolm Dorson, the head of emerging-market strategy at Global X Management Co. “I would look at asset classes that have recently suffered, but could benefit from a Fed pivot.”
The ratio between MSCI Inc.’s index for emerging-market growth stocks and its gauge for value stocks has risen 1.6% in the past three days, the biggest outperformance since March 24. That carries on from the last month’s faster gain for the growth segment, putting this quarter on course for the best relative performance since September 2020.
Before the recent rally, emerging-market stocks suffered a $2.6 trillion selloff with investors concerned that interest rates would remain higher for longer in the US. China’s slowing economy and increased geopolitical tensions further soured sentiment. In that scenario, value stocks extended their outperformance, rising to the highest in almost four years against growth stocks.
“The earlier value momentum made sense given oil moving up to $95 per barrel, driving up energy names and higher prospective interest rates providing support for bank yields,” Dorson said. But now, “we don’t anticipate a significant amount of support to the property or banking sector, which means that value could underperform growth into the fourth quarter.”
Some of the stars of the value-stock outperformance in the first 10 months of the year were energy companies Petroleo Brasileiro SA and Ultrapar Participacoes SA, Indian engineering firm Larsen & Toubro Ltd. and beverage maker Fomento Economico Mexicano, all of which are sitting on year-to-date gains of 40% or more.
Now growth stocks are rebounding. Tencent Holdings Ltd. is up 8.1% this month and Alibaba Group Holding has gained 3.4%, putting them once again on the list of top contributers to the MSCI Emerging Market Index. South Africa’s Naspers Ltd. and South Korea’s LG Energy Solution are also moving up the ranks. Taiwan’s semiconductor companies, whose rally started months ago, are consolidating their lead further.
Among national benchmarks, South Korea, Israel, Mexico and Brazil are outperforming this month. Even in Latin America, a region dominated by value stocks, it is the growth stocks such as Magazine Luiza SA and Atacadao SA that are leading gains, based on MSCI’s gauge for the region.
US exchange-traded funds also reflect the changing landscape in favor of growth. Bull funds that seek to amplify emerging-market equity returns by 300% and 200% via riskier derivative bets have handed investors returns of 15% and 9.6% in November. Meanwhile, another fund that invests in emerging-market companies deriving a majority of their revenue from financial technology has posted the best performance among ETFs that buy and hold equities.
This article was provided by Bloomberg News.