Emerging Market Equities Primed for Rally

According to a recent note from Alpine Macro, emerging market (EM) equities are poised for a substantial rally.

Key Factors Affecting EM Stocks

Several key factors are converging to create a favorable environment for EM stocks:
– Cyclical profit upswing
– Policy easing
– Undervaluation

These elements suggest that EM stocks may outperform developed market counterparts.

Drivers of Profit Recovery

Alpine Macro points to improving global manufacturing and increased capital spending in non-tech Asian economies as critical drivers of the anticipated profit recovery.

Additionally, EM central banks are moving towards further monetary easing, which could provide extra momentum.

Profit Outlook

"EM firms’ profits are poised for a strong cyclical rebound," states Alpine Macro, emphasizing the role of an upswing in global manufacturing and accelerating capital spending in non-tech Asian markets.

China's Role

China's recent shift towards fiscal stimulus adds to the positive outlook. According to the firm, "Chinese policymakers are in the early stages of a reflationary push," indicating that further fiscal measures are likely forthcoming.

Such aggressive stimulus measures could enhance earnings for not only Chinese firms but across the broader EM landscape.

Undervaluation of EM Equities

Alpine Macro argues that EM equities are currently undervalued, providing a solid foundation for outperformance in dollar terms. "EM equities and currencies are markedly undervalued, providing a solid foundation for dollar-based outperformance against DM ex-U.S. stocks," says Alpine.

Rally Dependence on China's Actions

However, the potential extent of this rally will hinge on how far China is willing to take its fiscal efforts. The firm notes, "Return upside will be dependent on how thoroughly China adopts a 'whatever it takes' approach on reflation."

Positive Momentum

Alpine Macro suggests that the relative performance of EM stocks is already improving. They assert, "EM relative equity performance is turning a corner," indicating positive momentum since last year. Given the right conditions, they recommend maintaining at least neutral exposure to EM stocks while getting ready to increase allocations as conditions change.