The term emerging market was coined in 1981 to denote lower and middle-income countries. Since then, these economies have vaulted from obscurity to become an attractive asset class of their own. The stock markets in countries like China, India, Brazil and other emerging markets attracted foreign equity capital worth an estimated $50 billion annually over the past 38 years.

However, shareholders have had it tough as emerging market equities endured a weaker 2019. The MSCI Emerging Markets Index, with a year-to-date gain of around 13% (as of Dec 24, 2019), have underperformed the broader S&P 500 market’s return of more than 28% by a wide margin. But things are looking up in 2020 as pundits predict a promising outlook for this category, which makes up around 80% of the world’s economy.    

As a proof of this bullish sentiment, BlackRock – the world’s largest asset manager – is overweight on emerging market equities heading into the next year. The largest U.S. bank, JP Morgan, is ‘modestly overweight’ on the asset class. Meanwhile, Europe’s HSBC Asset Management also favors the emerging markets that include some of the largest countries in the world like China, India and Russia.     

Let’s discuss the 2019 performance of emerging markets in more depth, plus what to expect in 2020.

Emerging Markets in 2019: A Difficult Year for Investors

Certain reasons stand out.

First and foremost, protracted trade headwinds between Beijing and Washington unsettled investors and stalled global economic growth. As the conflict intensified, the world’s two largest economies issued a flurry of duties and counter duties and threats of further duties on each other’s imports worth billions of dollars. Market watchers were increasingly concerned about the prospects of the world’s slide into recession, eventually biting into corporate profits. In particular, such tensions tend to have an oversized impact on the emerging markets as tightness in trade affect their export-driven economies.

Second, the uncertainty regarding global growth together with concerns over Britain's exit from the European Union lend support to the U.S. dollar, offsetting capital into the emerging markets. After all, a strong greenback makes commodities more expensive for those holding other currencies. Since many emerging countries sell dollar-denominated commodities, they stand to lose.

Finally, slowing economic growth in countries like Brazil, Mexico, India, Russia, Saudi Arabia, and particularly in China, plus financial strife in Turkey and Argentina, made investors flee the emerging markets.

Emerging Markets in 2020: An Excellent Investment Opportunity

Looking forward, things seem to be looking up for the emerging markets in 2020.

The recent agreement on a phase one trade deal between U.S. and China, plus easing Brexit uncertainty, boosted the market sentiment. The developments – coming after months of wrangling – is seen to prop up the demand outlook and revive global economic growth.

Recognized as having high growth prospects and rapid pace of industrialization, emerging markets have long been investors’ go-to destinations. Per IMF projections, growth in advanced economies will slow to 1.7% in 2019 and 2020, while emerging market and developing economies will experience growth of 3.9% in 2019 and accelerate to 4.6% in 2020.

To counter recession fears that was largely fueled by a lingering trade war and global economic slowdown, the Fed enacted three rate cuts this year – in July, September and October – which weakened the greenback to some extent. It also hinted at keeping interest rates unchanged in 2020 unless there is any drastic change in the economic outlook. Thanks to a dovish Fed, emerging market equities should be up for a stellar performance. This because they typically export commodities and tend to perform better in a low-rate, low-dollar environment.

Taking a cue from major central banks (including the U.S. and Europe), emerging market policymakers enacted a series of rate cuts this year. In the latest round of action, central banks in China, Mexico, Egypt and Thailand, among others, resorted to rate cuts in November in order to keep signs of a slowdown at bay. In October too, countries like Brazil, India and Russia took the policy easing route by slashing rates to get back on the high growth path.   

Meanwhile, the OPEC+ group announced cutting output by as much as 500,000 barrels per day from Jan 1 for three months to end a supply glut and prop up prices. This is in addition to the existing production curbs of 1.2 million barrels per day by OPEC, Russia and other non-member oil producers. The cartel’s renewed supply cuts lifted energy and commodity companies and helped give the emerging markets another lift.

Last but not the least, from a valuation perspective, emerging markets look attractive. They hold a P/E ratio of around 14, significantly lower than 22.5 for the United States and also less than Europe’s 17. As such, emerging market equities are quite inexpensive compared to the developed economies and thus, won’t burn a hole in your pocket.

Our Choices

Market watchers and experts feel that emerging market stocks could post strong performance next year. Attractive valuations and faster economic growth are just some of the factors working in their favor. At the same time, they make for great defensive plays and will benefit from a dovish Federal Reserve. While adding emerging market stocks to your portfolio looks prudent, picking winning stocks may be difficult.

Here, Zacks’ proprietary methodology comes in handy. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Rank is a reliable tool that helps you trade with confidence regardless of your trading style and risk tolerance. To learn more about how you can use this proven system for market-beating gains, visit Zacks Rank Education