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

Fortune4 min read
Netflix’s Oscar Factory
The Silicon Valley video giant has invested billions in original content. In Roma, it finally has a Best Picture contender.
Fortune2 min read
Punches, Delivered
In the crowded field of food delivery, startups DoorDash and Postmates have built a potent rivalry.
Fortune3 min read
Decision Time
IN THE THIRD QUARTER OF 2007, at the summit of the last bull market, U.S. companies in the Standard & Poor’s 500 purchased a staggering $172 billion worth of their own stock. Some two years later, when those same shares were priced like week-old bisc