Fortune

Why They’re Worth the Rocky Ride

Shaky currencies, scary economies, and global trade tensions shouldn’t deter investors from buying into these inexpensive, rapidly growing markets.

FOR A CHORUS OF THE LEADING VOICES in investing, it was the monster rally whose time had come. For about five years, a group of sages, including value-investing boldface names Jeremy Grantham, Mark Mobius, and Rob Arnott, kept pronouncing that shares of companies in emerging markets offered the world’s rarest blend of attractions: deep-discount prices compared with U.S. equities, cheap currencies, and the prospect of robust growth driven by a burgeoning population of youthful middle-class workers and consumers—all factors that long promised a powerful comeback in the beaten-down sector.

Two years ago, their prophecies came true. Valuations in emerging markets—a group of some 25 countries defined by low but growing per capita incomes, rapid industrialization, and zigzagging currencies—took flight. In the 24 months beginning in late January 2016, shares in the benchmark MSCI emerging markets index surged 85%, beating the S&P 500 by 31 percentage points. Despite the sprint, emerging markets looked as if they had plenty of room to run. Not only did they still boast a lot more earnings per dollars paid for equities in the developed world, they also now benefited from what they had long lacked: surging optimism and powerful momentum.

Then the revival suddenly collapsed. After peaking on Jan. 26, the MSCI dropped 22%, seven times the fall in the S&P 500, crushed by negative news about

You're reading a preview, sign up to read more.

More from Fortune

Fortune3 min readPolitics
The Art of the (Reluctant) Deal
Many of the global crises that emerged in the past two years will be partially solved by pragmatism, as the real risk of economic catastrophe serves as a wake-up call.
Fortune4 min read
In Privacy We Trust
American lawmakers and techies alike have called for a federal data privacy law like Europe’s GDPR. An impossible dream? Astonishingly, not anymore.
Fortune17 min read
Safety Meets Strength
Rising interest rates and geopolitical tensions are creating new threats to global growth. The best move for investors? Buying companies that are strong enough to control their own destiny, no matter what the economy does.