2019 Market Review
Stock market returns in 2019 ended on a high with the MSCI EM index adding over 18% (in U.S dollar) for the year, with a 12% gain in the final quarter. Despite this very strong total return, emerging equities still under performed their developed market counterparts. In particular the US delivered a blockbuster year at 31% (as measured by the S&P 500 Index). It was a highly eventful year characterized by a material increase in volatility and a moderation in GDP growth. Elections, protests, trade wars and interest rate policy were just some of the bigger events we witnessed in the year where the trade war in particular influenced sentiment.
The ongoing US-China trade dispute dominated headlines where market sentiment often seemed to follow the ups and downs of the negotiation (or perhaps just Presidents Trump’s tweets). There were many “false starts” which corresponded to big swings in the market. We did see a material de-escalation in December where both sides agreed to a “phase one deal”, which proved a strong tailwind into year end. Perhaps a trade “truce” is a more apt description given the detail around several elements of the agreement (particularly in relation to intellectual property and technology transfer) remains sparse at best. Having said this, further tariffs have been avoided for now while the US will roll back certain measures in exchange for increased agricultural purchases by the Chinese. There is little doubt the dispute is harming global trade so this rollback is certainly welcome. Chinese equities ended the year with a gain of over 23%.
Fears over a potential US recession spurred the US Federal Reserve (FED) to revert back to cutting interest rates in 2019. They cut the benchmark rate by 25bps three times which was in stark contrast to the four hikes they made in 2018. These actions proved a strong contributor to sentiment and perhaps eased the pressure on some of the more indebted emerging nations. It also somewhat curtailed the march forward of the US dollar with several emerging market currencies gaining ground. The Russian Rouble was strongest, gaining over 11% versus the greenback.
Every year events occur that shape the short-term narrative. Some go on to become structural issues while others drop quickly from the discussion. We do not see any change to this general principle for 2020 or for any following year for that fact. We do not recall many commentators predicting a blockbuster year for equities at the start of 2019 and see where we finished.
For us the argument for investment in the developing world remains wholly intact. It is supported by structurally faster growing economies, lower but growing incomes, positive demographics and the huge potential for efficiency gains (driven in a large part by the adoption of technology). For these reasons alone we believe making an allocation to the space makes sense for a long-term investor. The bottom-up picture is really where the opportunity lies of course. There is in the region of 25,000 listed companies in developing countries. This is a very substantial searching ground for active investors. Clearly there are a huge number of companies one should go nowhere near but there are also many best-in-class businesses, run by top quality management who have identified an opportunity and who have built fantastic franchises. This is what should drive the conversation, but sadly most focus almost exclusively on the top-down picture predicated around the makeup of poorly defined indices.
Is now the time to enter the space? We think it is always the right time to invest in the developing world.
Originally Posted on January 29, 2020 – 2020 Outlook: Opportunity for Active Investors in Emerging Markets
Views and opinions have been arrived at by LGM Investments, a part of BMO Global Asset Management, and should not be considered to be an investment recommendation. The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
Investing in emerging markets can be riskier than investing in well-established foreign markets
Disclosure: BMO Global Asset Management
This website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Information on this website does not constitute an offer for products or services, or a solicitation of an offer in any jurisdiction in which such solicitation or offer would be unlawful. Products and services can only be offered by appropriate representatives of the respective manager. Notice to residents of the United Kingdom: For the avoidance of any doubt, the information on this website does not constitute an offer for products or services to persons in the United Kingdom.
BMO Asset Management Corp. is the investment adviser to the BMO Funds. BMO Funds are distributed by Foreside Financial Services, LLC. Member FINRA/SIPC. FINRA’s BrokerCheck.
All investments involve risk, including the loss of principal.
Foreign investing involves special risks due to factors such as increased volatility, currency fluctuation and political uncertainties.
Investors should carefully consider the investment objectives, risks, charges and expenses of the BMO Funds. This and other important information is contained in the prospectuses and/or summary prospectuses, which can be obtained by calling 1-800-236-3863. Please read carefully before investing.
BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management and trust and custody services. Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).
BMO Asset Management U.S. consists of BMO Asset Management Corp., BMO Asset Management (Canada)® includes BMO Asset Management Inc.
BMO Taft-Hartley Services and BMO Trust and Custody Services are a part of BMO Global Asset Management and a division of BMO Harris Bank N.A., offering products and services through various affiliated entities of BMO Financial Group.
Investment advisory services in the United States are provided by BMO Asset Management Corp., BMO Asset Management Limited, LGM Investments Limited, BMO Global Asset Management (Asia) Limited, Pyrford International Ltd and Taplin, Canida & Habacht, LLC.
Investment advisory services in Canada are provided by BMO Asset Management Inc., BMO Asset Management Corp., LGM Investments Limited, BMO Global Asset Management (Asia) Limited and Pyrford International Ltd.
Financial promotions in the United Kingdom are provided by LGM Investments Limited, Pyrford International Ltd, and BMO Asset Management Limited. LGM Investments Limited, Pyrford International Ltd, and BMO Asset Management Limited are authorized and regulated by the Financial Conduct Authority in the United Kingdom.
Asset management services in Hong Kong are provided by BMO Global Asset Management (Asia) Limited, licensed by the Securities and Futures Commission to conduct regulated activity Type 9 – asset management under the Securities and Futures Ordinance.
Investment products are: Not a Deposit — Not FDIC Insured — No Bank Guarantee — May Lose Value.
Copyright © 2020. BMO Financial Corp. All Rights Reserved.
TM/® Trade-marks/registered trade-marks of Bank of Montreal, used under license.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from BMO Global Asset Management and is being posted with permission from BMO Global Asset Management. The views expressed in this material are solely those of the author and/or BMO Global Asset Management and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.