Since the Fed first hinted at the possibility of a taper in May, anxiety has roiled emerging markets. Over the last three months, EM stocks have fallen 12% in dollar terms, underperforming developed markets by 10% while EM currencies on average have tumbled by 7%. Russ Koesterich, Chief Investment Strategist at BlackRock, says EM stocks look undervalued relative to EM markets' growth potential and healthy corporate profits, have the potential to outperform their developed market counterparts over the next several years. Although he sees few immediate catalysts for a near-term EM rally, Koesterich highlights four signposts that could signify a significant and prolonged reversal in EM performance: (1) More sustainable growth, as evident in less volatile GDP growth (2) Inflation that is more under control, as evident in stabilization of inflation expectations (3) Asset-price bubbles deflating (4) EM countries becoming less reliant on short-term foreign capital funding. (VIEW LINK)
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