Here's What Will Blow Up the Impressive Bull Rally in Emerging Market Stocks
Investors concerned that the rally in emerging market stocks will be crushed by geopolitical tensions are probably wrong, said Bank of America analysts in a note on Thursday, Sept. 14, adding this rally will likely end the same way they all do: trounced by a recession or suffocated by overvaluation, according to Bloomberg.
Emerging market stocks have been on fire since early 2016, rallying close to 60%. Investors have recently become concerned that increasing tension in the Korean Peninsula will cripple the EM rally, though. Bank of America analysts offered advice for investors to ride the bull market in Asia/EM.
Overly analyzed geopolitical plays, "central bank zig zags," and a narrow focus on earnings are distractions for investors in the bullish emerging markets rally, Bank of America analysts said after reviewing six previous rallies in emerging market equities since 1976.
Here's what Bank of America analysts said investors ought to do to best buy corrections and pullbacks in the rally:
- Sell when price-to-book valuations, currently at 1.77 for the MSCI EM Index, reach three times, or when you see a U.S., Asian or global recession coming
- Historically, EM stocks rally about 230% on average in a bull market that lasts around 42 months -- know what the historical top might be
- Watch for other risks, which include the following: An armed conflict breakout in Asia China going into deflation, a credit crisis or a capital flight New antitrust regulation breaking up Asia's oligopolies, especially in the internet industry Asian governments or public service sectors confiscating the continent's huge free cash flow
This impressive surge is largely similar to the past six rallies, suggesting developing nations' equities could double in two years. "We think a substantial overweight in Asia/EM equities is warranted. Let the bull market do its job," analysts wrote.
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