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By Jeremy Glaser and Patricia Oey | 05-19-2015 10:00 AM

Emerging Markets: What to Know Before You Go

We dig into recent performance, the role of reforms, and concentration issues with some emerging-markets indexes.

Note: This video is part of Morningstar's May 2015 International Investing Week special report.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. It's International Investing Week. Today, we're looking at emerging markets. I'm here with Patty Oey--she is a senior analyst at Morningstar. We'll look at some of the recent performance of emerging markets and also some of her favorite funds.

Patty, thanks for joining me.

Patricia Oey: Thank you.

Glaser: Let's start with performance. We've seen kind of a bounceback in emerging markets recently. What's really driving that performance?

Oey: So, the MSCI Index is up about 10%, year to date, and it looks like maybe things are starting to pick up in emerging markets. But it's important to look beneath the numbers. What we're seeing is that the main drivers of performance have been China and Russia and, actually, it really hasn't been fundamentals that have been driving those markets. The other markets have been pretty tepid--low single digits.

Glaser: Let's start with Russia. Why did that gain so much?

Oey: Russia has had a big rally this year. Last year, the markets got pummeled, the ruble got pummeled. This is because of sanctions, followed by a tumble in the oil prices. By year-end, Russian stocks were trading at about 4 times P/E. So, [the Russian market] definitely oversold, and what we've seen is just a big bounce from that oversold situation in Russia.

Glaser: How about that China performance? The economy hasn't been doing so well, so why are stocks moving up so much?

Oey: Right. It's a good illustration of how people like to correlate strong GDP performance with strong stock market performance. And in China, we're always seeing news that GDP is slowing, but yet the markets have been on a super tear. What's interesting is that China is trying to reform its economy; there are many different things going on. They are definitely trying to open up their capital markets. One of the things they did is they are trying to improve liquidity in their capital markets, so they loosened margin-trading requirements. So, we've seen a whole flood of retail investors in China open up a lot of accounts, trade on margin. So, things are pretty frothy there. Any time the Chinese government might try to tap the brakes, we could see a lot of volatility.

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