Value Stocks May Offer Best Prospects in Emerging Markets

Many stocks in developing nations have underperformed for years, but they could thrive in a post-pandemic world.

By Conrad de Aenlle

As surprising as the rally in stocks has been during the pandemic, the strength of emerging markets may be more of a shocker.

Stocks in these markets are supposed to need a robust global economy to thrive, and their governments haven’t been able to borrow or print money to tide them over through the crisis as much as governments in mature economies.

But they have held their own. Between March 23, when American stocks hit bottom, and Sept. 30, Emerging Markets iShares MSCI, a large exchange-traded fund, rose 44.2 percent. The S&P 500 SPDR E.T.F., which tracks the main American index, rose 49.6 percent.

As stellar as the returns have been in emerging markets, a closer look reveals a universe of haves and have-nots.

The first group of markets, mostly in East Asia, has come through the pandemic far better medically and economically, and its stocks have soared. China especially has experienced something like the V-shaped recovery that Western economies continue to hope for. Countries in the second group, just about everywhere else, have suffered more on both counts, and their markets have fallen or recorded meager gains.

The very mixed showing presents a conundrum for prospective buyers: They may have to spend a lot of money on the haves or a lot of time waiting for the have-nots to recover sufficiently for their stock markets to come back into favor. The solution may be to identify a third group, the not-yet-haves.

“The big-picture story is a tale of two emerging markets,” said Richard Schmidt, a co-manager of the Harding Loevner Global Equity fund. “East Asia is driving the recovery,” but “it’s much harder for us to find attractively priced businesses in those countries.”

In the places “where all those horrible things are happening, those markets are down,” Mr. Schmidt added. But investors there may be “pricing in too much short-term news and not enough long-term.”

The discrepancy in returns is so pronounced because the developing countries with the best health outcomes also have the strongest economies, some strategists say.

“China, Korea and Taiwan have done better in handling the virus,” said Arjun Jayaraman, a manager of the Causeway Emerging Markets fund. “Much of the rest of emerging markets are more likely not to have as much health care infrastructure, or firepower fiscally and on the monetary side, to counter the slowdown.”

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