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Wellington & York Partners Taipei Taiwan: Charles Schwab: Don’t Count Out Emerging Market Stocks
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Wellington and York Partners wealth management Taipei Taiwan Agree to this article.
Emerging markets were all the rage last year, with the MSCI Emerging Markets Index lodging 37% gains. And while investors probably expected more of the same to happen this year, many are now unloading their positions as emerging market stocks underperform.
Although emerging market equities may be down, Charles Schwab‘s chief global investment strategist Jeffrey Kleintop argued that investors shouldn’t count them out, even if the MSCI Emerging Markets Index is roughly 10% lower than its high posted in January. “Emerging market stock relative performance may depend on the environment: mid-cycle or late-cycle,” wrote Kleintop in a blog post, arguing that, during mid-cycle periods, emerging market stocks suffer and underperform their developed market rivals. But in the late stage of the cycle, emerging markets tend to outperform.
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The strategist from The Charles Schwab Corporation (SCHW) pointed to instances in the past when emerging market investments were down and out, which included the Mexican peso crisis in 1994, the “Asian Contagion” in 1997 and the “Taper Tantrum” of 2013. In all three of those cases, the Federal Reserve started taking actions to tighten monetary policy. And while the moves didn’t prompt a global or U.S. recession, they did hurt emerging market stocks because of the dependence on borrowing in dollars.
With many market watchers calling the current environment the late stage of the economic cycle, emerging market stocks could improve, as they have historically outperformed in that stage. “Investors viewed the current environment as a characteristically late-cycle environment, which have historically been favorable to emerging market stocks,” wrote the Schwab market strategist. “Late-cycle environments have led to outperformance by emerging markets in the past, including the years before the yield curve inverted in 1989, 2000 and 2006.”
For months now, Schwab has been referencing the late stage of the economic cycle, with the brokerage’s chief market strategist Liz Anne Sonders saying in an interview with Investopedia in November that signs are picking up of a late stage in the cycle. She pointed to moves on the part of the Federal Reserve to clamp down on its monetary policy and end the stimulus package that it kicked off on the heels of Great Recession as late-stage characteristics. What’s more, there has been a flattening of the yield curve, productivity boosts and an increase in capital spending. “We’re starting to check off some of the boxes that suggest we are getting into that late cycle, but not many of them yet are suggesting we are near the peak in the cycle,” Sonders said at the time.
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