Emerging markets emerge again

It's been a nasty year for emerging markets, but valuations are starting to look appealing.

It's been a nasty year for investors in emerging markets. The MSCI Emerging Markets index, a key benchmark, hit a six-year low this summer. In the past five years, it has slid by 15%; developed-world stocks have gained 35%.

China's slowdown and the commodities downturn have all hit growth, which is now running at an annual pace of around 3% a sharp drop on the average of about 6% seen in the last decade. The prospect of higher US interest rates, which would draw investment away from traditionally risky assets such as emerging markets, is another headwind.

Still, "a little bit of good news goes a long way when an asset class is this out of favour", as Ben Laidler of HSBC points out in the Financial Times. The worst appears to be over. The macroeconomic backdrop is improving, says Capital Economics. The big deceleration in emerging-market growth occurred earlier this year, "and conditions have since stabilised".

Activity in China looks set to rebound following recent interest-rate cuts, with further monetary easing also likely. Credit growth is accelerating, and commodities could stabilise as Chinese demand firms and supply is cut following the previous price slump.

Meanwhile, according to Capital Economics, valuations are starting to look appealing. Emerging markets are on a price/earnings (p/e) ratio of 11, compared to 15.6 for developed markets, the widest gap in almost a decade. Given all this, "we suspect a sustained outperformance of emerging-market equities will begin sooner rather than later".

Asset management group GMO estimates that emerging markets are now cheap enough to return 4.6% a year over the next seven years, compared to 1.1% for top-quality US equities, says the Financial Times in short, emerging markets are due a comeback.

Recommended

I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021
How to invest in Africa as it takes its place in the post-pandemic sun
Emerging markets

How to invest in Africa as it takes its place in the post-pandemic sun

The African Continental Free Trade Agreement has come into force. Favourable demographics, improving governance and a growing technology sector also b…
14 Jan 2021

Most Popular

Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021
Leasehold reforms promise the end of a nightmare for many homeowners
Property

Leasehold reforms promise the end of a nightmare for many homeowners

Horror stories about unscrupulous landlords profiting from a legal relic of the feudal era are about to get a happy ending, says Simon Wilson.
16 Jan 2021