Advertisement

Value in emerging-market stocks

Emerging-market stocks have lagged in recent years, but their long-term performance remains appealing.

922_MW_P07_Markets
Emerging markets are structurally stronger these days

While the pain for global stocks was spread far and wide in October, "emerging market equities have been under the heaviest fire so far this year", says Steve Johnson in the Financial Times. In October, fund managers said they were the most "underweight" (allocating less money than usual to the asset class) emerging markets that they've been in two years, according to the latest survey from Bank of America Merrill Lynch. Just six months ago they were heavily "overweight" in the region.

Advertisement - Article continues below

A tough year combined with October's sharp sell-off means emerging markets now look significantly cheaper than most other markets. The average emerging market trades at 14 times earnings, compared with the UK on 16 times, Europe at 17, and the US at 23.

"If the past is any guide to the future, it could be time to fill your boots," says Johnson. Measured by price-to-book ratio (which compares the price of shares with the assets on their balance sheet), emerging market equities trade at a 36% discount to the developed world. A gap like this "has historically been a strong buy signal", Ewan Thompson of Neptune Investment Management's Emerging Markets fund tells the FT. Since 2001, a gap this wide has seen emerging market stocks outperforming their developed counterparts over the subsequent five years.

Positive structural change

And while emerging markets have lagged in recent years, their long-term performance is appealing. Since the turn of the century, emerging markets have returned an average of 7.9% a year, compared with 5.4% for US shares and 3.5% for Europe, says Mark Atherton in The Times. What's more, Jan Dehn of investment manager Ashmore tells The Times, most emerging markets are in a structurally-stronger position today than they were in the early 2000s. Their share of global GDP has risen, their foreign currency reserves have quadrupled and they are far less dependent on foreign capital. Many countries have also brought inflation under control, trimmed spending and brought down public debt.

The long-term outlook is auspicious, too 70% of global growth is expected to come from emerging markets in the next five years, according to Adrian Lowcock of financial services company Willis Owen. And while they currently account for 45% of global GDP, their stockmarkets only make up 29% of global equity markets, Atherton notes. So the sector should also benefit from a "catch-up" element over time.

Advertisement
Advertisement

Recommended

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
Beware the hidden risks when investing in emerging markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Emerging markets: buy when the news is bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019
Emerging markets bounce back after a miserable few months
Features

Emerging markets bounce back after a miserable few months

Investors in emerging markets have been enjoying some long-awaited relief after a miserable few months.
13 Sep 2019

Most Popular

Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020