Investing.com -- Emerging market equities are primed for a strong rally, according to a recent note from Alpine Macro.
Several key factors, including a cyclical profit upswing, policy easing, and undervaluation, are aligning to create a favorable environment for EM stocks to outperform their developed market counterparts, according to the firm.
Alpine Macro points to improving global manufacturing and increased capital spending in non-tech Asian economies as critical drivers of the expected profit recovery.
Additionally, EM central banks are moving toward further monetary easing, which should provide additional tailwinds.
"EM firms’ profits are poised for a strong cyclical rebound, underpinned by an upswing in global manufacturing, further EM monetary policy easing, and accelerating capital spending in non-tech Asian economies," Alpine Macro states.
China's recent shift toward fiscal stimulus is said to add to the bullish case.
"Chinese policymakers are in the early stages of a reflationary push, with more fiscal measures likely on the way," adds the firm.
They believe that aggressive stimulus measures could lift earnings not only for Chinese firms but also for companies across the broader EM landscape.
Furthermore, Alpine says that EM equities are currently undervalued, which provides a solid foundation for outperformance in dollar terms.
"EM equities and currencies are markedly undervalued, providing a solid foundation for dollar-based outperformance against DM ex-U.S. stocks," Alpine explains.
However, the extent of this rally will depend on how far China is willing to go with its fiscal efforts. "Return upside will be dependent on how thoroughly China adopts a 'whatever it takes' approach on reflation."
Alpine Macro argues that the relative performance of EM stocks is already improving.
"EM relative equity performance is turning a corner," the analysts write, highlighting the positive momentum since last year. With the right conditions in place, Alpine recommends maintaining at least neutral exposure to EM stocks while preparing to go overweight as conditions evolve.