Emerging market stocks may soon find their time in the spotlight after a bruising 2018.
That’s the forecast from Darrell Cronk, president of Wells Fargo Investment Institute.
“A year ago right now, the three biggest consensus trades heading into 2018 were a global synchronized economy, being long emerging markets and shorting the U.S. dollar,” Cronk said. “And candidly, none of those three have worked in calendar year 2018.”
The U.S. Dollar Index is up 5.5% year-to-date. Emerging market stocks are down roughly 15% so far this year, while the S&P 500 (^GSPC) is up 2.8%.
But Cronk thinks the environment for emerging markets stocks is changing heading into 2019.
“They’re trading at 9.7X next year’s earnings,” Cronk said. “You’re getting probably the cheapest entry point that we’ve experienced in 20 years.”
Cronk said there have been only three times in the last two decades where emerging market stocks have been this cheap. “All three of these times have proven to be excellent entry points for investors with a 1-3 year time horizon,” Cronk noted.
As for the aforementioned U.S dollar surge in 2018, which hurts emerging market economies as it makes their U.S. denominated debt more expensive, Cronk isn’t expecting another greenback surge in 2019.
“Even if the U.S. dollar stabilizes, that will be positive for emerging markets,” Cronk noted, adding that within emerging markets, he likes South Asia and Latin America.
Cronk expect emerging market stock returns in the “upper teens” for 2019, about 15-17%. That’s more than double his 6-7% forecasted gain for the U.S. S&P 500.
Given Cronk’s expectations for outsized returns in emerging markets, he thinks investors’ portfolios should be overweight emerging market stocks vs. U.S. stocks.
“The U.S. has outperformed global markets for so many years — We think that’s starting to change,” Cronk noted. “Emerging markets will be one of the areas in the equity market where you’ll see the best returns in 2019.”
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
More from Scott: