BlackRock’s Chief Investment Strategist Russ Koesterich noted in their latest Market Perspectives issue that he still believes emerging markets represent a long-term opportunity and that investors who are still underweight should consider bringing their exposure back to at least a market weight.
However, he was quick to also add that not all emerging markets are equal and investors need to be selective. For example: Within the three main emerging market regions — Latin America; Eastern Europe, the Middle East and Africa (EMEA); and Asia — Latin America is the only region that trades at a premium to its historical average due to the sharp climb in Brazilian stocks without a corresponding increase in earnings (year-to-date, Brazilian valuations are up roughly 40%). In contrast, EMEA trades at a significant discount compared to its history, but the relative cheapness is largely a function of a persistent and understandable discount on Russian stocks. Meanwhile, emerging market Asia valuations at roughly 11.5x earnings are largely in line with their historical average, providing some room for future multiple expansion should the fundamentals continue to improve.
Koesterich also noted that the relative cheapness of China’s equity market is a relatively recent phenomenon as for most of the past decade, the country traded at a significant premium. Between 2004 and 2009, China traded at a 50% to 150% premium to the broader MSCI emerging markets index but since 2009, that premium has steadily eroded. Today, China trades at a significant discount not only to developed markets like the United States, but also to the broader emerging markets indexes.
At the end of the issue, Koesterich concluded by saying:
Growth is likely to outshine other parts of EMs and, with the notable exceptions of India and Indonesia, current account surpluses suggest that these countries are less vulnerable to higher interest rates. Finally, while earnings growth remains muted, it is leveling out versus developed markets.
That said, risks remain, most notably the extent and depth of China’s debt and real estate problem. However, for now we believe the risks are contained and mostly discounted in the price of Chinese banks, although Chinese property and building companies may still be vulnerable. While EM Asia is not without its risks or downsides, it offers something exceptionally rare in today’s market: the potential for an undervalued asset class.
To read the latest Market Perspectives commentary from BlackRock, Emerging Markets: A Closer Look, go to the website of BlackRock.
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