Archived material may contain dated performance, risk and other information. Current performance may be lower or higher than the performance quoted in the archived material. For the most recent month-end fund performance information visit www.calamos.com. Archived material may contain dated opinions and estimates based on our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions at the time of publishing. We believed the information provided here was reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value and return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance reflected at NAV does not include the Fund’s maximum front-end sales load. Had it been included, the Fund’s return would have been lower.

Archived on July 17, 2019

After the Punch Bowl, Can There Still Be Life in the Party?

Global Equity Team Perspectives by Nick Niziolek, Kyle Ruge and Todd Speed

Global asset prices have benefited from the multi-year cycle of global monetary policy stimulus, as the search for yield has encouraged investors to invest capital in all corners of the world. With the Fed continuing its path toward monetary policy normalization and the ECB edging toward tapering, some investors have expressed less confidence in the return potential of an array of assets, including emerging markets.

EMs: "Don’t worry about us so much, we’re good"

One of the defining features of emerging markets is their dynamism, and conditions today are already quite different from the challenges that punished emerging markets in 2013’s Taper Tantrum. In our view, emerging markets are significantly less vulnerable to an external shock than a few years ago, with improved current account balances, private sector deleveraging, lower inflation, and greater policy flexibility overall. Emerging markets are in a favorable position as their higher real interest rates provide a cushion to higher rates in developed markets (Figure 1).

Figure 1. Higher interest rates may help insulate EMs
Emerging Markets ex China, real rate differentials with U.S. (% pts) Figure 1
Source: Morgan Stanley, “EM Economics Playbook,” EM recovery Gaining Momentum, August 2017.

Global growth and a rising tide

Global economic growth is more synchronized today versus 2013, with improving demand providing support for major EM economies. According to a recent article in The Wall Street Journal, 45 countries tracked by the OECD are all expecting positive growth this year, with 33 economies poised to accelerate from a year ago.* This shared prosperity is boosting EM export growth and, in turn, supporting a pickup in domestic demand and nominal GDP growth in these economies. The IMF forecasts GDP growth in EMs rising from 4.3% in 2016 to 4.6% this year and 4.8% in 2018.

As we have discussed in the past, the drivers of higher rates and policy normalization must be considered in tandem with the changes themselves, while the path and ending point are perhaps even more important to asset prices. Emerging markets should benefit from policy changes in response to stronger global growth as opposed to spiking inflation, which is the environment we expect to continue.

So, yes, yields will probably rise as central banks unwind monetary stimulus, but these changes are well communicated. We believe asset prices should fare better with a gradual path and low neutral rate than in past periods.

The first change can be the hardest

During the Taper Tantrum, emerging markets struggled. However, since the Fed has moved from rhetoric to action, emerging markets have adjusted to the low and gradual path of tightening. As Figure 2 shows, in the wake of the second, third and fourth Fed hikes, emerging markets consistently outperformed developed ones.

Figure 2. Equity returns by tightening event
% Total return during the 60 days following Fed tightening event
Figure 2
Past performance is no guarantee of future results. Source: Bloomberg. Start dates of each period are as follows: Taper Tantrum, 5/8/2013; Hike 1, 12/17/2015; Hike 2, 12/14/2016; Hike 3, 3/15/2017; Hike 4, 6/14/2017.

Conclusion

As we continue down the path toward normalization in global monetary policy, EMs will perhaps be evaluated more on the merits of their own fundamentals and less as a proxy for global liquidity. In our view, emerging markets are experiencing better macro conditions broadly, improving corporate fundamentals, with rising earnings and higher return on equity, and attractive valuations versus history and peer markets.




    *The Wall Street Journal, August 23, 2017, “Global Economies Grow in Sync,” Josh Zumbrun.

    Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.

    As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

    The MSCI Emerging Market Index is a measure of the emerging market equity market. The MSCI World Index is a measure of developed market equities. The S&P 500 is considered generally representative of the U.S. stock market. Indexes are unmanaged, do not include fees or expenses and are not available for direct investment.

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    Archived material may contain dated performance, risk and other information. Current performance may be lower or higher than the performance quoted in the archived material. For the most recent month-end performance information, please CLICK HERE. Archived material may contain dated opinions and estimates based on our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions at the time of publishing. We believed the information provided here was reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

    Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value and return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance reflected at NAV does not include the Fund’s maximum front-end sales load. Had it been included, the Fund’s return would have been lower. For the most recent month-end fund performance information visit www.calamos.com.