Plenty of things could upend the two-year rally in emerging-market equities. Yet no one seems to agree on just what they are.
Sure, the bulls abound. Fiera Capital Corp., the Montreal money manager that oversees $123 billion, expects attractive returns for several more years. Research Affiliates, a sub-adviser to such firms as Pacific Investment Management Co., calls emerging markets the " trade of a decade."
Yet contrarians are sounding the alarm, with Morgan Stanley the latest, saying that emerging equities may see a repeat of the year 2000, which began well and ended with a 32 percent drop. Here are five potential causes for concern:
1) Tech Downturn
To UBS’s Bhanu Baweja, normal warning signs such as an inflection in the growth cycle, expensive valuations or declining oil prices aren’t visible. The bigger risk could be a downturn in the burgeoning technology sector, according to Baweja, the London-based head of emerging-market cross-asset strategy.
He’s "skeptical" emerging-market technology firms will replicate last year’s revenue. Hardware companies may be particularly susceptible as memory demand falls. A selloff in bitcoin could also hamper the industry, he said.
Baweja’s base case remains 10 percent returns in 2018, down from last year’s 38 percent rally. He expects growth and returns to slow by the end of the year.
2) Stronger Dollar
Jeff Gundlach, chief investment officer at Los Angeles-based DoubleLine Capital LP, says a near-term rally in the U.S. dollar and valuations at near-record levels will probably prove a temporary setback for developing-nation stocks.
"It’s not a great time to be buying emerging markets because the price point is pretty bad," the billionaire bond manager said during his annual "Just Markets" webcast last week. "The trade location is pretty bad -- you’re up where it reversed before."
Still, Gundlach said developing nations present an attractive option for "years to come" for longer-term investors. He cites the Shiller P/E Ratio, a measure of valuation based on cyclically adjusted price-to-earnings ratio, which shows investors paying a premium for U.S. stocks compared to emerging-market equities. Research Affiliates has made the same argument as it projects outsized returns for emerging markets.
3) Economic Slowdown
London-based consultant Capital Economics expects emerging-market economic growth to slow to 4.2 percent in 2018 from 4.4 percent last year.