That old saw behind why people invest in emerging markets -- more risk brings more reward -- might need to be reworked.
As stocks in the developed world gyrate wildly on trade-war rhetoric, relative volatility has subsided in the emerging world, according to a ratio between the two indexes that track the measure. It’s stayed below its five-year average since the start of this year, a reversal from the last quarter of 2017.
Valuations, meantime, the other side of the risk-reward equation, look compelling, fund managers say. The MSCI Emerging Markets Index trades at a 30 percent discount to its developing-word counterpart, steeper than its 25 percent average during the past decades. The difference approached zero in the aftermath of the financial crisis.
“When you have an asset class that has better return potential, is cheaper and actually has better fundamentals then developed markets, then people should be arguably overweight,” said Jan Dehn, London-based head of research at Ashmore Group Plc, which oversees $70 billion of developing-nation assets.
Risk is so high in the developed world that Dehn suggests investors stuff up to 90 percent of their money in emerging markets. Standard Life Investments Ltd. is overweight in emerging-market debt and neutral to underweight in developed bonds in its tactical asset allocation funds, partially due to increased trade volatility and risks in the latter, according to global strategy head Andrew Milligan.
Volatility may increase in the developed world as central banks shrink balance sheets, while strong emerging-market economic growth may tempt investors, said Greg Lesko, a money manager at Deltec Asset Management in New York.
“The EM world never did QE,” Lesko said. “Growth had been the missing part of the EM story. That’s now looking better.”
For some investors, it’s simply a matter of finding “micro narratives” in markets that aren’t tied to trade headlines, said Mike Moran, chief economist for the Americas at Standard Chartered Bank.
“We still like the EM story,” he said. “The fundamental backdrop still looks pretty supportive, notwithstanding the regularity of adverse headlines on trade.”
-- Aline Oyamada and Justin Villamil, Bloomberg News
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Stocks to ponder
Yangarra Resources Ltd. (YGR-T). This stock may resurface on the positive breakouts list if analysts’ expectations are correct. There are eight analysts that cover this stock, and all eight analysts have buy recommendations. Management has strong growth expectations for 2018 with production to rise to between 9,000 and 10,000 boe/d (barrels of oil equivalent per day) from 5,740 boe/d reported in 2017. The consensus target price suggests the share price has 46 per cent upside potential. Calgary-based Yangarra Resources is a junior oil and gas company with operations focused on the Cardium in central Alberta. Jennifer Dowty reports.
The Rundown
Rob Carrick’s 2018 ETF Buyer’s Guide: Best Canadian dividend funds
Canadian dividend ETFs have gone from darlings to dead weight in the past 12 months. The latest installment of the Globe and Mail ETF Buyers’ Guide documents the bleak returns from exchange traded funds holding dividend-paying stocks for the year to March 31. Even with dividends factored in, several of these ETFs lost money. It’s quite a contrast from the double digit returns in last year’s ETF guide chapter on Canadian dividend funds.
Expecting a major pullback in the markets? Then these are the two TSX bank stocks to own
The upside opportunity of Canada’s biggest banks is clear: They have so much control over mortgages, loans and capital markets that they reflect the economy in which they operate. That usually translates into big profits and rising dividends. But what’s the downside when economic conditions deteriorate? And which bank is best-suited for riding out difficult times? David Berman reports (for subscribers).
Others (for subscribers)
Friday’s analyst upgrades and downgrades
Friday’s Insider Report: Companies insiders are buying and selling
Others (for everyone)
Wall Street analysts can’t agree if the trade war threat is real. Here’s what they are saying
First cannabis fund cuts exposure to sector, buys medical names
Ackman is said to face investor exodus amid poor performance
A $210-billion manager says market is too jumpy about trade war
High stakes, high expectations as earnings season heats up
George Soros prepares to trade cryptocurrencies as prices plunge
Trump trade row flips risk, turning emerging markets into havens
Number Cruncher
Six cybersecurity firms with sustainable dividends
Ask Globe Investor
Question: I have seen a number of questions regarding TFSA withdrawals, but none has addressed the scenario where the account balance exceeds the maximum contribution limit. If I withdraw $80,000 from my TFSA, for example, can I recontribute the full amount the following year or would I be limited to $57,500?
Answer: Whatever amount you withdraw is added to your contribution room as of Jan. 1 of the following year. So, assuming you have made the maximum annual contribution each year from 2009 through 2018 ($57,500 cumulatively), if you withdraw $80,000 now, you would be able to recontribute $80,000 next year – plus whatever additional contribution room is available in 2019. (The annual limit – currently $5,500 – is indexed to inflation and rounded to the nearest $500.) Any unused contribution room from previous years would also count toward your total contribution room.
--John Heinzl
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What’s up in the days ahead
It’s not just a lackluster energy sector that’s keeping the TSX down. Tim Shufelt will report on an even more troubling trend that every Canadian investor should be concerned about.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston