Emerging markets didn’t lack for drama in 2019. New presidents took the reins in Latin America’s two giants, Mexico and Brazil, promising radical change—Mexico’s Andrés Manuel López Obrador to the left, and Brazil’s Jair Bolsonaro to the right. In India, avowedly pro-business Prime Minister Narendra Modi won a second term by a landslide. Investors got the “wrong” result in Argentina’s election, yielding an instant debt crisis. And, oh yes, Hong Kong blew up, adding to China’s list of thorny policy dilemmas.
Yet the events that dominated emerging markets were made in the USA including the Federal Reserve’s shifting mood on interest rates and President Donald Trump’s unpredictable turns on trade with China. Stocks soared through mid-April on a steady Fed and rumors of trade peace, crashed through the middle of the year as Trump turned hawkish, and then rallied again from September as the U.S. central bank loosened rates again.
Playing by America’s rules, as it were, emerging market equities came in a distant second. The
exchange-traded fund (ticker: EEM) has gained 12% year to date, compared with 27% for the S&P 500 index. Emerging market bonds were a different story. The
ETF (EMB) has returned more than 15% in the falling interest-rate environment, 1.4% better than U.S. high yield, a traditional alternative.
That said, performance differed significantly by country and sector. The hottest national market this year was one that conspicuously avoided political shocks, Russia. A diminishing threat of Western sanctions and a 22% surge in oil prices powered a 35% jump for the
ETF (RSX). At the other end of the spectrum, Chinese internet stocks have shrugged off the trade war to rebound smartly from a calamitous 2018. The China-dominated
ETF (EMQQ) has gained 33% this year.
The trickiest market to follow, except for China, has been Brazil. Stocks there climbed in anticipation of Bolsonaro pushing through a key pension reform, then dropped once the goal was accomplished and the economy remained nearly stagnant. The
ETF (EWZ) is ending the year in line with global emerging markets, up 13%.
The biggest disappointment in emerging markets was India, where the economy missed the memo about Modi’s triumph and slowed precipitously, driven by a shadow banking crisis. The
ETF (INDA) crashed 13% in two months following the May election, then crawled back for a 7.6% gain so far this year. South Africa underperformed with a 5% year-to-date gain as new President Cyril Ramaphosa found reform a heavy slog.
Looking back, this column read the 2019 tea leaves reasonably well, though of course not faultlessly. On the plus side, count a March 8 column calling a slowdown for Chinese shares, an April 26 piece putting a buy on Russia, caution on South Africa despite Ramaphosa’s election (May 10), and a bullish take on Chinese tech giants
Alibaba Group Holding
(700.Hong Kong), published on June 7.
One conspicuous misread was a June 21 column enthusing about Brazilian pension reform. The reform did clear key hurdles over the following weeks, but the market plummeted. A March 15 piece talking up a continued rally in emerging markets broadly seemed prescient for about a month, until the U.S.-China trade dialogue went rocky again.