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Emerging Markets to the Rescue

By Benjamin Shepherd on July 7, 2016

Can you both fish and cut bait? Apparently so, because in the week following the Brexit vote investors ran to both riskier assets such as stocks, and to safer assets such as gold and bonds. So clearly the markets are too fickle at this point to make any rash decisions.

In searching for some hopeful signs amidst the chaos we found an unexpected positive option investors: emerging markets.

You’d think the usually sensitive emerging markets (EMs) would be getting slaughtered now, given their usually the first to spook when economics turn scary. But after the Brexit vote the MSCI Emerging Markets Index is close to flat, and so far this year the MSCI Emerging Markets Index is up by about 5%. With most commodity prices stabilizing, and the prospect of higher U.S. interest rates off the table, EM stocks have been rallying lately.

One reason is the EMs haven’t been buying U.S. dollars in a flight to safety. When they do that it tends to hurt their exports by making them more expensive in global markets.

Also, the Brexit vote—in which a country that had been seen as one of the cooler heads in geopolitics did something a little crazy—makes a lot of EM countries look pillars of the international community.

On top of that, the U.S. economy is still doing pretty well and the U.S. market is a major destination for EM exports. So if the U.K. and even the E.U. were to fall into a recession thanks to the Brexit, the EMs would still do well by comparison.

That means large multinationals that do business in the EMs, even those based in the U.K., could likely see at least some Brexit damage offset by sales to EMs. The Brexit mess could make emerging markets an attractive investment option.

Personal Finance recently added an emerging markets mutual fund to its fund portfolio. It was billed as a contrarian play because the fund focuses on foreign small- and mid-cap stocks, but for the reasons I outlined above I think it could go more mainstream as we move through the Brexit process.

So if you’re thinking about running to bonds, with yields hitting records lows, or to gold, which is a capricious safe-haven at best, think again. Now may be the time to load up on some emerging market stocks.

 


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