February 19, 2016
Fourth Quarter 2015: Investment Perspective
Emerging market stocks now stand at the cheapest valuation relative to U.S. counterparts since the Asian Crisis of 1997–1998. The litany of challenges facing emerging market investors—weak currencies, excessive debt and political crises—are similar today as then. But so too are the fundamental strengths—favorable demographics, reform potential, and entrepreneurial energy. Reflecting on 1998, there was no particular cause for optimism for emerging markets. And yet—as the chart on page 3 illustrates—investors who braved the uncertainty were rewarded with a decade of 15% annually compounded excess returns. Our case for being overweight in emerging markets today is simply that valuations at this extreme argue for it. As in 1998, markets can over-discount adverse outcomes. In fact, the catalyst for a reversal of valuation discrepancy is not one particular and unforeseen event. All that is required is that not all of the panoply of negatives come about. If investors have priced in a 50% chance of a sovereign default by Brazil, and it does not materialize, then Brazilian assets have to reprice.
On a quarterly basis, Hirtle Callaghan publishes our perspective on the current market. We have included the first page of that piece below. If you would like to receive the full perspective, please contact us.