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Emerging Markets

Emerging markets’ rebound has been sharp this year, with the benchmark MSCI EM index up 12%.

The big winner is a bit of a surprise: Poland, where equities are up 21.5%. (All results in this column are through March 23.) The Central European nation’s advance had been helped by projected economic growth of 3.3% this year, following last year’s 3.1% gain in gross domestic product.

No. 2 is South Korea, where stocks have risen 17.3% in 2017, despite the ouster of the country’s president as a result of an influence-peddling investigation involving conglomerates, including the Samsung Group. Shares of Samsung Electronics (ticker: 005930.Korea), one part of the Samsung empire, are up more than 20% this year. The third-best performer has been Mexico. Its stock market is up 15.3%, as the peso stabilizes and fear of U.S. trade barriers eases.

The biggest loser? It’s Greece, down 6.8% in 2017, as it struggles to meet creditors’ conditions before a July debt-payment deadline. The No. 2 loser among emerging markets is Russia, off 3.8%. Last year, investors had expected the Russian economy to return to growth in 2017. But with no signs that President Donald Trump will lift sanctions on Moscow, what’s on investors minds now is Vladimir Putin’s alleged meddling in the U.S. presidential election. The country’s reputation for corruption also doesn’t help. (See Bill Alpert’s March 22 Barrons.com story, “Probes Show How Russian Money Travels the World.”)

Tied for third worst this year are Qatar and the United Arab Emirates, both up 0.3%. Their economies have been hurt by oil-production cuts they and other OPEC have implemented to shore up prices. With oil in the doldrums at $50 a barrel, OPEC may extend the output curbs past June. That would mean more lost revenue for oil-reliant nations.

OVERALL, COMMODITY PRICES have waned this quarter, tempering returns for many countries’ equity markets. Oil and iron-ore producer Brazil, up 44% over the past year, has climbed 9% in 2017, and mineral exporter Peru, up 34% in the past 12 months, is up about 7% this year. A bright spot: Turkish equities, which have rallied 12% this year, despite the lira’s weakness. Investors may be anticipating a further rally if an April referendum consolidates the power of President Recep Tayyip Erdogan, the target of a failed July 2016 coup.

The fading of the Trump rally in the U.S. has hurt emerging-market stocks, too. In the short term, that’s made iShares MSCI Emerging Markets (EEM) one of this year’s most-shorted exchange-traded funds. But emerging markets are much cheaper than the Standard & Poor’s 500 index, trading around 13 times estimated 2017 earnings versus the U.S. benchmark’s 18 times, notes Arjun Divecha, an emerging markets specialist at GMO.

Divecha favors Taiwan technology shares, Indian financials, Russian telecoms, and Korean consumer plays in the GMO Emerging Markets Fund II (GMEMX), which he co-manages. The fund has $5 billion in assets and a $10 million minimum investment requirement. He thinks that economically, “things look like they are getting better in emerging markets across the board,” and that, given reasonable valuations, “it is not a bad time” to be invested.

Email: dimitra.defotis@barrons.com

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