Emerging Markets Stocks Lead While US Bonds Retreat

Equities in emerging markets posted the strongest advance among the major asset classes last week, based on a set of exchange-traded products. US bonds, meanwhile, continued to slide, delivering last week’s biggest setback for broadly defined markets.

Vanguard FTSE Emerging Markets (VWO) was firmly in the winner’s circle for the shortened trading week in the US through Jan. 19. VWO advanced for a seventh straight week, rising 2.0% by the close of trading on Friday.

“The key ingredient for emerging markets is growth,” says Paul Fage, senior emerging markets strategist at TD Securities. “If you have the underlying growth story, markets can ride through Fed interest rate hikes – especially in an environment with dollar weakness.”

Last week’s biggest loser: investment-grade bonds in the US. Vanguard Total Bond Market (BND) slumped for a third week, falling 0.4%. Fixed income retreated on expectations that the recent gains in Treasury yields will continue. The 10-year rate ended the week at 2.64%, the highest since 2014.

Firmer US economic growth is driving yields higher. The federal government’s shutdown, which is in its third day, is expected to be a minor blip, if any, for the improving macro trend. Bloomberg reports that “Michael Feroli, chief US economist for JPMorgan Chase & Co., said in a recent note that first-quarter real annualized GDP growth would be trimmed by 0.12 percentage point each week until operations resume. Still, the closure ‘should have no effect on Fed policy’ and a meeting later this month of the policy-setting Federal Open Market Committee is likely to be a ‘non-event,’ Feroli wrote.”

 

For the one-year trend, emerging markets stocks continue to lead. VWO’s total return for the trailing 12-month period is currently 37.1%. That’s a solid premium over the second-best one-year performer: foreign property shares via Vanguard Global ex-US Real Estate (VNQI), which is up 30.7%.