iShares MSCI Emerging Markets (EEM) is up 16% thus far in 2016, four times the return of the S&P 500. Darshan Bhatt, co-founder of Glovista Investments, said emerging market stocks could extend that lead due to attractive valuations and strong earnings momentum.
"There is a lot of alpha, if one can avoid some of the problem countries in EM and allocate to countries in favor," said Bhatt, who is bullish on Chinese and Russian stocks.
"The benchmark MSCI China index has evolved with newer Chinese players like Alibaba (BABA) and Baidu (BIDU) growing in importance compared to the old smoke stack companies," said Bhatt. "As for Russia, we view it as a classic energy play that will move higher once the price of crude rebounds."
On the flip side, Bhatt said he is underweighting Mexico, calling the country's stocks expensive and "not attractive from an earnings growth perspective."
Bhatt said EM corporate earnings growth outlook will vastly surpass developed markets on account of EM economies' widely projected substantially faster GDP growth rates well into the middle of the century. Meanwhile, he said the relative volatility of EM corporate earnings will decline vs. its developed peers on account of EM economies' increasing reliance on consumption growth.
"By 2025, EM consumption is expected to reach $30 trillion, comprising half of world consumption expenditures," said Bhatt, adding that EM fiscal and demographic fundamentals are considerably stronger than developed markets.
Other macro factors that will help EM equities outperform their developed peers include the interest rate cycle in the direction of rate cuts, as well as "EM currency revaluation vs. the U.S. dollar with exception of yuan."