The old joke goes that an emerging market is one from which investors cannot emerge unscathed when things go wrong (as they inevitably will, according to the sceptics), says Russ Mould, AJ Bell Investment Director.
“But as inflation expectations creep higher, commodity prices rise and the dollar fights to hold its ground, investors could be forgiven for thinking that a decade or more of underperformance by emerging markets relative to developed ones might be about to come to an end.
“A key debate which continues to exercise financial markets is whether inflation is primed to make a comeback and – if so – what this could mean for asset allocation and portfolio strategies.
“The five-year, five-year forward inflation expectation in the US stands above 2% once more and financial markets are beginning to react: Government bond yields have ticked higher, Bitcoin has gone bananas and gold has held relatively firm.
“Moreover, within the context of equity markets, ‘cyclical’ growth (or ‘value,’ for want of a better word) is again trying to cast aside a decade of underperformance relative to perceived ‘secular’ growth sectors such as technology.
“This battle for portfolio style (and performance) supremacy within equities can be seen by comparing the returns provided by two exchange-traded funds (ETFs) in the USA: the QQQ Invesco Trust, which follows the price of the biggest non-financial stocks on the NASDAQ, and the Russell 2000 Value ETF.
“If the line on this chart goes up, ‘growth’ is outperforming. If it goes down, ‘value’ is outperforming. As can be seen, cyclical growth can point to a streak of outperformance that stretches back to summer 2020 although value is trying to forge a fightback after more than a decade out in the cold.