The Signals Coming from the Emerging Markets Petri Dish

Investors in U.S. markets, which have been impervious to the dire economic news, may want to pay attention to what’s happening in the parts of the world that can’t rely on government help.

Nicole Tung/Bloomberg

Nicole Tung/Bloomberg

Even though U.S. stocks are behaving like government stimulus will go on forever and Covid-19 will vanish shortly, emerging markets are giving investors a taste of what could happen when the world ultimately normalizes.

One notable trend is that value stocks in emerging markets have finally stabilized. Value stocks have underperformed for years, setting off a frenzied debate on whether or not the investing style still works.

“It seems that emerging markets are behaving defensively. Low vol is doing well and value stocks are not declining. Perhaps this is because emerging markets don’t expect a big stimulus to artificially keep them going through a second Covid wave and therefore have to rely on normal market dynamics,” wrote Damian Handzy, Style Analytics’ head of research and chief commercial officer, in the firm’s most recent analysis of factor performance.

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In the paper published on Monday, the research firm found that August was the first month since the crash in March that Europe, the emerging markets, and the U.S. have diverged from one another.


In emerging markets, value stocks shifted from generating big losses to being neutral, while growth equities became losers, after a long winning streak. In addition, quality stocks in emerging markets went from generating modest gains to delivering small losses. High volatility and momentum stocks both went from outperforming to underperforming, according to Style Analytics.

The firm has argued in past research that value is normally a standout during recoveries. The factor, however, has been a terrible performer in the current run-up. The behavior has raised questions about whether the recovery has really begun or whether the rally has been just a momentary rise in the middle of a larger overall market crash, according to the firm.

European markets also rotated from quality stocks to favor value and volatility, according to Monday’s paper. “Value stocks finally outperformed the European market but so did growth stocks, demonstrating that they can move together despite claims that they are ‘opposites,’” Handzy wrote. “Europe also saw a strong rotation toward higher-volatility stocks and away from quality stocks.”

In the U.S., however, investors seem to be drunk on government stimulus checks, according to Style Analytics. “Since the market bottom on 23 March, the U.S. market has essentially followed a single playbook: value down, growth, volatility and momentum up,” argued Handzy.