Emerging market stocks are off to a strong start in 2023, even though concerns remain for investors. Emerging markets have underperformed over the past two years as a rising dollar, interest rate hikes from central banks around the world, and the pandemic hit growth. The iShares MSCI Emerging Markets ETF (EEM) is up more than 22% in 2022 and fell more than 5% last year. However, this year the picture seems to have changed. EEM has advanced more than 8% this year, compared to a 1.5% gain for the S&P 500. Cheap valuations have made emerging market equities attractive to investors, as a weaker dollar, easing inflation and the reopening in China are expected to be a boon for these assets. “One of the primary attractions for emerging markets has been attractive valuations,” said Quincy Crosby of LPL Financial. “Again, they were neglected. They, except again, Brazil did well, India did well, they were essentially neglected by portfolio managers.” Still, investors differ on the outlook for emerging markets from here. Carlos Asilis, co-founder and chief investment officer at Glovista Investments, has a bullish outlook on emerging markets stocks, and advises investors to go overweight. Emerging markets equities should represent a 10% benchmark allocation to global equity indexes, Asilis said, adding that investors should take about a 12% weighting. For investors with high risk tolerance, this allocation could be as high as 20%, he said. “I would say 12%, 11% is roughly neutral, right? It makes sense to be at least 12%. And then, probably between 12% and I would say 16% makes sense,” Asilis said. Told. Most investors may find this an appropriate risk level, he said. Others took a more measured approach. Arthur Budaghyan of BCA Research said he does not expect the current rally in emerging markets to be sustainable, and urged investors to wait for better opportunities later this year. He estimates that the outperformance of emerging markets may stall or partially reverse in the next few months. But it could prove lucky for investors looking to get in later this year. “I think we will have an opportunity to overbuy or overweight the second half in the middle of this year,” Budaghyan said. They expect the reopening of the Chinese economy in the second half to boost economies in emerging markets. Moreover, slowing growth in those economies stemming from tighter monetary policy could reverse later this year as well. Budaghyan recently opened an Upgrade Watch on emerging markets, but remains underweight within the global equity portfolio. He expects investors to be better off keeping their cash in money markets or global bonds over the next several months. Meanwhile, LPL Financial’s Crosby said the rally in emerging markets could be short-lived, adding that any increased level of liquidity could push valuations down to less compelling levels. Crosby said, “Any suggestion in the market that the Fed is wrong, any suggestion that the Fed might actually move toward 50 basis points as opposed to the potential of 25 basis points … would bid up the US dollar.” Not all emerging markets are created equal. Even though emerging markets are generally performing better, some countries are expected to do better than others. Many market participants expect China’s equities to beat peers this year — despite some lingering concerns around travel. GloVista’s Asilis said, “A lot of our peers have been underweight on China, and they’ve dramatically underperformed over the past year and earlier this month, so I think there’s a lot of buying of Chinese equities.” ” The iShares MSCI China ETF (MCHI) is up more than 12% this year, after falling 24% in 2022 and 22% in 2021. Other markets Asilis find attractive are South East Asia, Taiwan, South Africa as well as Brazil. Meanwhile, BCA’s Budaghyan said he would be the overweight Mexican. While the country has exposure to the US, on which Budaghyan has a negative outlook, it has risks in the auto sector. The iShares MSCI Mexico ETF (EWW) is up more than 13% in 2023. Budaghyan said Mexico has been driven into an area of the US that is still seeing strong demand — that’s because previously a lack of supply made it difficult for people to buy cars. Strategists also favor engagement with South Korea and Chile. The iShares MSCI South Korea ETF (EWY) and the iShares MSCI Chile ETF (ECH) are up more than 10% and about 1%, respectively. One area Budaghyan will avoid is Chinese tech companies like Alibaba, Baidu and Tencent. Strategists worry about the long-term outlook for these firms, given the growing government involvement in businesses.