What is the theory on why Emerging Market and Developed International have been so undervalued since about 2012?
And what has changed such that they should return to fair value?[/quote]
The bond market in emerging countries tells a different story. In US dollar terms emerging market bond had heavy loss this year, and more losses are expected.
2 main issues for EM:
1) EM companies and sometimes government has a lot of debts in U.S. dollars, in a crisis situation like we are experiencing recently, EM countries will have difficulty servicing their dollar debt as lower local currency forces them pay more in local money for dollar debt.
2) EM economy lack leadership countries now. China used to be that role, but it already ran through its course of growth spurt. It is now stuck in middle income trap and slower growth which might not be enough to support its obligations from looming issue of serious population aging and shrinking workforce. The high level of private section debt load is another time bomb. The real estate bubble in China is 10 times the size of U.S. sub prime mortgage. A prolonged global recession could simply collapse the bubble. China is still leaking foreign currency reserve as rich Chinese will find out whatever way to move money overseas as China has no law to protect private properties/assets, and government can take over your assets at any time at will (communists in China got into power by that way, so they can do it again, rich people in China don’t feel confident put their money in China). Trade surplus used to bail out on that as surplus normally is more than the asset transfer. With trade war and developed countries in recession, they can no longer get foreign currency easily through trade surplus.
EM markets are highly correlated. Trouble in one country will quickly spread out to other countries.
EM stocks are good buy when market is chasing risky assets. In current situation I try to avoid.
