The Five Top Emerging Markets in January

U.S. stocks have started out 2017 much better than they did a year ago. With one day still to go in January, the S&P 500 has gained roughly 2.5% in the first month of the year, a marked improvement over the -5.9% loss the index suffered last January. But U.S. stocks have actually lagged most emerging markets thus far, with the top emerging markets more than doubling the return in the S&P 500.

The reasons why emerging markets are performing so well is up for debate. After an 11.2% gain in the MSCI Emerging Markets index (which tracks large and mid-cap stocks in 23 emerging market nations) in 2016, emerging market stocks may simply be building on that momentum. In contrast to U.S. stocks, which are at decade-high valuations, many emerging market stocks are undervalued after suffering annual losses in four of the five years prior to 2016. Thus, value investors concerned about the high valuations in U.S. stocks could be looking overseas to find value stocks.

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Regardless, many emerging markets are off to red-hot starts in 2017, as evidenced by the 5% gain in the iShares MSCI Emerging Markets (EEM) ETF this month. It’s only one month, and given their volatility and inherent risk, emerging market stocks can turn sour in a heartbeat. But they’ve been on a tear since Christmas, and the EEM ETF has been trading above its 25- and 50-day moving averages since the start of January (see chart below).

Top emerging markets have spurred a big spike in the EEM over the past month.

We’ll see how long emerging markets can keep up the momentum, but that’s a very encouraging chart. Some emerging markets have performed better than others, of course. To get a taste of where to look for the best emerging market stocks right now, I thought it might be useful to show you what have been the top emerging markets so far this year.

Here are five that stood out in January:

Top Emerging Market #1: Argentina

January Return: +19.1%

2016 Return: +45%

The big gains in Argentina’s Merval Index of late have a lot to do with the election of new President Mauricio Macri in late 2015. Investors are hopeful that Macri will revive Argentina’s tattered economy, and though the country’s GDP has yet to turn around, Macri has taken significant steps toward growth including lifting limits on the country’s currency and bringing Argentina back to international bond markets for the first time in 15 years. Optimism abounds in Argentina, and its stock market is responding accordingly.

Top Emerging Market #2: Brazil

January Return: +12.8%

2016 Return: +39%

The rally in Brazil’s Bovespa index is clearly a byproduct of buying low. After hitting a post-recession low last January, Brazil stocks have caught fire. Low valuations have been a big part of the rebound, but so have rising commodity prices. Brazil’s main exports are iron ore, oil and soy beans, and prices for all three commodities are on the rise.

Top Emerging Market #3: South Korea

January Return: +9.1%

2016 Return: +3.3%

Positive earnings news in Asian markets has helped prop up South Korea stocks, which posted only modest gains in 2016. Strong performances from Samsung Electronics, LG Electronics and steel producer POSCO have helped lead the way. But Korean stocks are clearly a target of bargain hunters too, as its benchmark Kospi dipped last summer to its lowest level since 2008.

Top Emerging Market #4: Singapore

January Return: +7.9%

2016 Return: 0%

Cheap multiples for Singapore stocks after a stagnant 2016 have helped as earnings for some of its largest companies have improved. Singapore’s Straits Times Index (STI) trades at less than 14 times forward earnings estimates, and the recovery in oil prices has spurred improvements in the country’s vast offshore drilling sector.

Top Emerging Market #5: Philippines

January Return: +7.2%

2016 Return: -1.6%

The election of Trump-like candidate Rodrigo Duterte as President last year concerned investors, pushing stocks in the Philippine Stock Exchange index (PSEi) up and down, particularly after Duterte threatened to sever economic ties with America in response to President Obama’s harsh criticism about some of his policies. Now, with a new regime in the White House, Filipino-U.S. relations have normalized (for the moment), and Philippine stocks have gotten a boost.

Bottom Line

Again, it’s very early in the year, so the list of top emerging markets in 2017 could look very different in six months, or even by the end of February. But this is a window into the emerging markets that are attracting the most buyers.

If you want to get more specific and learn which emerging market stocks you should be investing in (regardless of country), I highly recommend taking out a subscription to our Cabot Global Stocks Explorer advisory. Click here to do so.

Chris Preston

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