Reasons to be optimistic about Emerging Market Equities

Naam spreker: Anthony Corrigan, CFA – Client Portfolio Manager, Vontobel mtx

Ronde: 5

A frequent question we get asked by our clients is: where do we see EM equities going from here? With so many variables at play, such as the possibility that the US Federal Reserve increases rates to a point where a recession in the US is inevitable, this is not a simple one to answer. However, it is clear to us that an investor’s entry point will ultimately determine how profitable a trade turns out to be. For that reason, there seems to be no better starting point than looking at valuation.

 It is hard to believe that EM equities once traded at a significant premium to developed markets, but that is exactly what happened at the end of the commodities super cycle in the 2000s. That premium has since evaporated and the asset class now trades at a significant discount to developed market equities based on Shiller P/E – the cyclically adjusted price-to-earnings ratio which adjusts ten years of earnings for inflation. While Shiller P/E holds no predictive power for returns over the short term, the ratio can be a powerful indicator of long-term returns and as such should not be ignored.

 While EM equities certainly appear to be good value on a relative basis, there are concerns about the slowing global economy and its impact on emerging markets growth prospects. For example, the current estimates for real GDP growth for emerging economies in 2022 are just shy of 4%, around 1% higher than the estimates for developed markets. This growth differential is certainly narrower than in the past but is expected to widen again in 2023, primarily because China is expected to get a handle on its management of the pandemic.

 There are signs that Chinese stocks are regaining their footing after a very difficult period. As the second-largest economy in the world and the driver of growth in emerging markets, a resurgent China that has the pandemic under control and which has perhaps reopened to the rest of the world, has the potential to spur a strong comeback from EM equities.

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