Emerging market outlook: Is emerging market equity party over? Howard Marks’ Oaktree thinks otherwise

MUMBAI: Brokerage firm Morgan Stanley in February argued that emerging market equities have already seen their peak for the foreseeable future after having seen a stupendous rally since the Covid-induced crash last March.

The MSCI Emerging Market index has risen 71 per cent over the past one year, as investors chased higher returns and economic growth in Asian countries where the Covid-19 pandemic’s effect was less than that in developed economies like the US and the European Union.

Since the Morgan Stanley note, MSCI Emerging Market Index has largely remained flat and hovered around its all-time high, as a rise in bond yields in developed countries sparked some rotation out of emerging markets.

Oaktree Capital, co-founded by renowned value investor Howard Marks, however, believes the good times for emerging market stocks has only begun, as it believes the rotation out of growth stocks to value stocks is here to stay for some time.

“Many investors have begun rotating away from these high-priced stocks toward equities offering potential for both returns and reduced risk. Our approach to investing suggests it’s now wise to target the latter. We believe emerging markets offer great potential value,” Frank Carroll, co-chief investment officer at Oaktree, said in a note.

Carroll argued that many companies based out of emerging markets are well-equipped to absorb the shock of the pandemic and “may, consequently, be able to recover quickly.”

Oaktree believes economic recovery in emerging markets may be swifter than developed economies. In India, economists expect real GDP to grow anywhere between 11-13 per cent in 2021-22, which will be the fastest among large economies.

“We believe the rotation from growth into value is only just beginning. Considering both quantitative and qualitative factors, including past fundamentals and future expectations, we believe leaning toward value makes more sense now than ever,” Carroll said.

Oaktree’s outlook may calm the frayed nerves of Indian investors, who in recent weeks have been concerned that the spike in US government bond yields may trigger outflow of foreign capital from the stock market as returns on US fixed income assets become more attractive.