Market Sound Bite: A Volatile but Emerging World

Bring back the Dramamine. After a summer of light chop in the markets, the heavier seas have rolled back in so far this month. Volatility has returned, and its main drivers are familiar.

Early in the year, weakness in China’s economic data and falling oil prices drew concern about a global slowdown in overall demand. Meanwhile, the Federal Reserve was considering interest rate hikes, in addition to the one they pushed through back in December, which would have potentially weakened global economies further.
Markets declined sharply during the first six weeks of the year before bottoming in mid-February, as the data ultimately showed that the sell-off in oil was more supply-related than demand-related.

a-volatile-but-emerging-world

Markets recovered, absorbed the Brexit vote and just floated in a very tight range in July and August. Over the past two weeks, familiar fears over oil volatility and potential interest rate hikes have re-emerged, and equity markets are back to daily swings of 1-2%.

2016’s Big Surprise: Emerging Markets Take Off

After years of underperformance, culminating in a drop of almost 15% in the emerging-markets equity index last year, emerging-markets stocks have earned back the loss, with a gain of 14.8% through September 16. Emerging-markets debt has also tracked the rise in equities with a similar gain of 14%.

The recovery in commodity prices has helped quite a bit, with commodity-dependent economies like Brazil, Peru and Russia rising 62%, 52% and 26%, respectively, through August 31. As net exporters of things like oil, steel, precious metals, coffee and soybeans, these countries quickly benefited from the turnaround in commodities, as well as the weakening of the U.S. dollar. Also, political change in Brazil, with the impeachment of former President Dilma Rousseff, and a standoff in hostilities between Russia and Ukraine have allowed capital to flow back into these large emerging economies.

China’s stabilization has continued since February, as policymakers seem to have pulled off a relatively soft landing for its economy. Together, these dynamics have led to the substantial rally we have seen so far this year.1 2

Disciplined and Diversified

While of course we did not know that 2016 would finally be the year of the emerging-markets turnaround, we did communicate that maintaining allocations to emerging markets made sound investment sense.

Going into 2016, emerging markets were historically cheap relative to their own history and to developed markets. The long-term secular trends of growing populations and increasingly skilled and educated workforces — leading to rising incomes and purchasing power — remain fully intact.

So here we are, heading into the fourth quarter and emerging markets are leading both our equity and fixed-income programs. Sticking to the discipline and staying diversified have clearly shown merit this year.

The Education Story

Across the emerging world, literacy rates continue to rise.  In 2015, 93% of the population aged 15 and older was literate versus 91% in 2010 and 88% in 2000. Additionally, 127 million people are currently pursuing a higher education, which represents a 21% increase just from 2010.

The translation from education to income is real. Between 2010 and 2015, the number of households with annual disposable income in excess of $10,000 grew by 39% to 539 million. From India to Vietnam, and from Egypt to Brazil, consumer expenditure on education has exploded over the past five years.3

Growth in Consumer Expenditure on Education in Selected Emerging Market Economies (EMES): 2010-2015

education-chart
Source: Euromonitor International from national statistics, Eurostat, the United Nations (UN) and the Organisation for Economic Cooperation and Development (OECD)

The Big Picture is Key

There are plenty of challenges in the world, from terrorist threats and interest rate uncertainty to subpar economic growth and an atypical election just two months away.
A near-term market correction should never be a surprise, but beyond the next quarter or two lies the next decade or two. There are millions and millions of people who are seeking the opportunity to learn, work and advance their standing in life. The impact will be profound, and investors can reap many rewards in the years ahead because of it.

 

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Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC (“Hewins”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli LLP. Information pertaining to Hewins’ advisory operations, services and fees is set forth in Hewins’ current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
John Bussel
John Bussel

Principal, Regional Director, Chief Investment Officer

John Bussel is a Principal, Regional Director and the Chief Investment Officer for Hewins Financial Advisors, based in Miami, FL. With more than two decades of experience in investment management and planning for private and family-based foundations, John oversees every facet of Hewins' investment program and approach.

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Market Sound Bite: A Volatile but Emerging World

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