Stocks, bonds, currencies, commodities; almost nothing was spared from epic spikes in volatility over the past week … with a notable exception:
Emerging-market stocks, specifically the BRICs (Brazil, Russia, India and China)!
Bloomberg reports that 30-day volatility in U.S., European and U.K. stock markets went through the roof after the Brexit vote as shown in the graph below.
Emerging-market stocks are typically viewed as riskier to begin with, and so you would expect volatility to spike even higher in these markets. But that was not the case.
The reaction from investors in the BRIC markets to the Brexit turmoil was nothing more than a big yawn, with 30-day volatility levels barely budging. In fact, volatility in these emerging stock markets is actually flat to down from where they were at the end of March, as seen in the graph below!
Why such a muted reaction for these markets that are traditionally more volatile and far more sensitive to negative news?
It turns out that some money managers are viewing emerging markets as the new safe haven in times of trouble for developed markets.
As political chaos descends across Europe, institutional investors are turning to more stable emerging markets for buying opportunities, according to Bloomberg. “You can certainly make the case that some emerging markets are now safer than parts of the developed world,” said Sergei Strigo, head of emerging-market debt at Amundi Asset Management in London.
Analysts at Societe Generale in France recommend avoiding European bonds, many with sub-zero yields, in favor of Russian debt as a “safe haven.”
Investors are also pouring money into emerging-market stock and bond ETFs at a quickening pace, with $1.75 billion of inflows last week alone.
And beaten-down South African stocks attracted the most money since the financial crisis market bottom in March 2009.
It looks as if this could be a lasting trend worth taking advantage of, too. Consider these stats: While the broad Euro Stoxx Index is down 10.8% year-to-date, mostly thanks to declining Western European stock markets …
South Africa’s Johannesburg Stock Exchange All Index has gained 8.4% …
Turkish stocks are up 7.5%, Morocco has gained 8% and Russia has surged 21.6% higher!
Or take a look at stock markets in emerging Asia …
India’s Nifty 50 Index is up 2.2%, South Korea is up 2.5% and Taiwan stocks have gained 5.9% …
Philippine stocks are up 11.5%, Indonesia 14% and shares traded in Thailand are up 15%!
In terms of valuation, the argument in favor of emerging stock markets is even more persuasive. The MSCI Emerging Market Index has a price-earnings (P/E) ratio of just 14.5, compared with 19.3 for the S&P 500 Index. And several individual emerging stock markets are cheaper still. Stocks in Hong Kong and Turkish shares both have a P/E of just 10.3 and Russian stocks trade at only 8.4 times earnings!
Emerging markets may not be widely considered a safe haven from volatility, but with the European Union in turmoil and other major economies like Japan and even the U.S. so deeply in debt, the growth opportunities in select emerging stock markets are just too good to pass up today.
The political upheaval in the wake of the Brexit vote continued today. Former London Mayor Boris Johnson, who backed Brexit and was expected to run for the prime minister post, said he would not be standing as a candidate. Boris was considered a favorite to take over after fellow Conservative David Cameron said he would be stepping down within three months.
Cameron, who supported remaining in the European Union, said he wasn’t the right person to lead the country after the Leave vote won last week’s referendum. Other candidates have stepped up. Earlier Thursday, Michael Gove, the justice secretary who supported the Leave side, shocked the political establishment by announcing that he would enter the fray. Theresa May, the domestic security chief, said she would also be running.
U.S.-led airstrikes hit two ISIS convoys leaving Fallujah over the past two days, destroying some 175 vehicles carrying militants out of the city, U.S. officials said. Iraqi security forces said they destroyed other vehicles during the attacks. U.S. officials didn’t say how many ISIS militants were killed. Iraqi officials said that dozens died. A U.S. official estimated that the vehicles could have carried 250 fighters.
Iraqi security forces positively identified the convoy as belonging to ISIS, officials said. The liberation of Fallujah has fueled an exodus of thousands of families, overwhelming refugee camps run by the government and aid groups.
Walmart expanded its free, two-day shipping program to the entire U.S. The pilot program is intended to compete directly with Amazon Prime. It offers buyers free, two-day delivery on any item for an annual price of $49, about half the $99 Amazon Prime subscription price. The Amazon product, however, comes with access to Amazon’s streaming services like Prime Music and Prime Video.
The service is only available for items that Walmart sells directly on Walmart.com. The company wants to expand the delivery system to third-party sellers eventually.
The Money and Markets team