Big Bets Placed on Upside Potential in Emerging Markets

Bets on Emerging Market Growth Stocks Soar Amid Overstressed US Equities

Equities in emerging markets have become increasingly attractive. Equity investors and analysts increasingly turn their attention to emerging growth stocks on optimism that they pose significant upside potential. The push comes amid growing concerns that growth stocks in the US might be overstretched after a strong bull run in the first half of the year.

Emerging Growth Stocks Outperformance

Likewise, the MSCI Emerging Markets index, which tracks emerging growth plays, is poised for a 5% gain this week, its best rally since late last year. The index has outperformed the overall US stocks for the first time in seven months.  Some stocks that have performed exceedingly well are in sectors sensitive to economic growth and consumer demand segments.

Emerging market growth stocks are rising at a faster pace than value stocks in the US, one of the reasons why investors are turning their attention to them. With the MSCI Emerging market index outperforming the S&P 500, economists expect the trend to continue as emerging economies’ gross domestic products grow 3.2% quicker on average than in richer countries.

Concerns over the global economy plunging into recession have waned significantly, going by the solid economic reports. The US going slow on monetary policy tightening at the back of growth in the labor market and solid retail and manufacturing sector have helped shrug off concerns about the global economy’s health.

Improving Economic Outlook

A solid US economy growing at an impressive rate is also helping support some of the emerging markets that rely on it as a key destination for products. A resilient US economy is a key destination for exporting nations, therefore, offering support to emerging markets.

Signs of waning inflationary pressure should continue encouraging a dovish monetary policy stance from the FED highly needed to support the US economy. At the start of the year, there were concerns that the US would plunge into recession if the FED persisted with its aggressive monetary policies. With the prospect of rate cuts becoming increasingly clear, the US economy looks set to remain in a phase of robust growth, something that should continue supporting emerging markets.

Optimism about economic growth is the catalyst behind aggressive bull strategies in the market. Investors are increasingly looking for ways to multiply equity returns in some battered sectors. Consequently, emerging markets have emerged as a battleground.

Likewise, investors and analysts are increasingly focusing on stocks of companies in consumer discretionary sectors like e-commerce, retail and automotive in emerging markets. The sector is likely to outperform on robust economic growth owing to increased consumer spending. In addition to consumer discretionary stocks, the focus is also on infotech and communication stocks that continue to bounce back after a long period of consolidation.

Risks In Play

Nevertheless, a cloud of uncertainty hangs in the air as the global economy is not yet out of the woods. Rising energy costs with oil prices ticking higher and aggressive interest rate hikes in recent years could bite in the long run. There is still the prospect of the US economy experiencing a mild recession due to the high-interest rate environment. The US economy plunging into recession could deal a big blow to sentiments in emerging markets equities.

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