Battered emerging market stocks may offer astute investors opportunities

INVESTING in emerging markets (EMs) over the past 3-5 years has been somewhat akin to crossing a minefield. This is quite apart from China - where the domestic stock market delivered stratospheric returns for just over a year, before floundering more recently due in part to overvaluation and a shock devaluation of the yuan. China's correction, in any case, has added to the region's woes.

The broader emerging market bloc appears to be hard pressed to find a driver for a turnaround. Based on the MSCI Emerging Markets Index, one, three and five-year annualised returns are in the red, to the tune of 21, 4.4 and 3.1 per cent, respectively. Stocks are in fact at five to six-year lows. The most unloved markets are emerging Europe and Latin America. In comparison, emerging Asia is faring relatively better, thanks to optimism about markets such as the Philippines and India.

Fund flows reflect the ongoing malaise. The Institute of International Finance (IIF), which tracks portfolio flows into EMs, finds that non-resident inflows to the region have averaged US$11 billion a month in the past six months - only half the pace of the previous five years. The IIF goes on to highlight headwinds. International investors, for one, have begun to rebalance their portfolios away from EMs, a trend underpinned by the strengthening US economy and dollar. With the strong dollar, refinancing risk among EM corporates has risen. Much of this debt may not be effectively hedged against currency risk. The outlook for EM exports is also weak, and global trade has slowed since the 2008 crisis. World trade, the IIF says, grew just 1.5 per cent over the past 12 months compared to a long-term annual average of 7 per cent pre-crisis. This has "put pressure on EM earnings, corporate profits, household income and retail sales, denting growth".