Templeton, BlackRock Say Now's the Time to Buy Emerging Markets

(Bloomberg) -- Emerging markets are poised to rally after more than $7 trillion in stocks slid into bear territory, according to three of the world’s largest money managers.

Strategists and investors from Goldman Sachs Group Inc., Franklin Templeton Investments and BlackRock Inc. say cheap prices, rising corporate profits and strong fundamentals will outweigh risks from a tit-for-tat trade war, rising interest rates and potential U.S. recession.

"We do like EM assets, particularly EM equities," said Isabelle Mateos y Lago, chief multi-asset strategist at BlackRock Investment Institute, the asset manager’s think tank. "It’s a combination of the global growth backdrop, earnings expectations for emerging-market corporations and valuations."

Yet bulls are in the minority. More than half of market participants expect the selloff in developing-nation stocks and currencies to continue, according to a Bloomberg survey of 20 investors, traders and strategists. Pessimism towards developing-nation stocks is close to the highest level in 23 years, according to the Bank of America Merrill Lynch Risk-Love indicator.

BofAML strategists including Ritesh Samadhiya said that’s "normally a sign to increase exposure, not reduce it," as long as it doesn’t coincide with a recession. And recent headwinds such as trade tensions and a stronger dollar shouldn’t derail stocks much longer, according to Franklin Templeton.

Here are six charts that support emerging-market bulls:

• The performance of emerging-market equities relative to U.S. large caps, as measured by the spread of rolling three-month returns, is near a threshold of -17 percent, which hasn’t been breached since the global financial crisis.

• While calling the bottom is never easy, developing-nation stocks have rallied an average of 32 percent in the 12 months after their deepest drawdown of the year, according to data compiled by SunTrust Private Wealth.

• Weekly outflows from emerging-market debt funds hit the lowest since the U.S. election in the week ending June 27, according to EPFR Global data. The last three redemptions of that magnitude or greater preceded rallies in developing-nation dollar bonds during the next three months.

• The trade competitiveness of developing nations is close to the same level as Jan. 20, 2016, the beginning of the big emerging-market rally.

• If the past decade is any guide, dollar strength isn’t likely to prove a headwind for emerging-market assets much longer. Sharp rallies in the greenback have typically lasted three to eight months and rarely exceed a year. The latest one is five months deep.

• While the number of developing economies in expansion mode has declined since hitting a peak in February, the good news is that emerging markets have historically bounced back quickly -- even after 2008.

The MSCI Emerging Markets Index fell 0.3 percent at 8:06 a.m. in New York Wednesday.

To contact the reporters on this story: Giulia Morpurgo in New York at gmorpurgo1@bloomberg.net;Ben Bartenstein in New York at bbartenstei3@bloomberg.net

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Alec D.B. McCabe

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