Regression analysis of historical data carried out by JP Morgan Asset Management (JPMAM) gives some positive pointers for emerging markets going forward.
Political uncertainty and currency volatility have increased sell offs which had already been triggered by concerns about economic stability and the outlook for growth. This has left emerging market equities at attractive valuations for investors with a long time horizon, in the view of JPMAM.
“Despite significant short-term headwinds for the asset class, the long-term structural dynamics for many emerging market economies remain intact,” said Richard Titherington, chief investment officer, emerging markets equities at JPMAM.
“Urbanisation ratios in India and China are dramatically below US and Japan, which should lead to higher levels of income and consumption, supporting market returns.”
“Volatility has weighed on emerging market equity performance, resulting in cheaper valuations,” Titherington noted. “When price-to-book (P/B) values have fallen below 1.5 times, the MSCI Emerging Markets index has historically registered double digit returns over the following 12 months.
“Given emerging markets are approaching their lowest levels in over five years, history suggests that investors can expect reasonable returns going forward, especially relative to developed market equities.”
“Investors focused on long-term fundamentals will find this presents an attractive entry point. There are always unforeseen risks in emerging markets and it is an asset class driven more by sentiment and confidence than others.
After the strong performance of developed market equities in 2013, emerging market equities currently trade at the largest discount to developed market equities in nearly 10 years.”
Titherington cautioned, though, that investments are made in companies rather than countries, and there is significant differentiation between the winners and losers within those markets.
“The difference in total returns in MSCI country performance over the last 12 months has spanned more than 50%, highlighting the importance of a selective investment strategy.”
“At the moment, buying EM is neither obvious or popular – but buy before it is obvious, because the obvious thing is almost always wrong,” added Titherington. “History suggests fortune favours the bold.”
Further data to emerge from JPMAM’s research shows the emerging markets share of global nominal GDP is forecast to reach nearly 40% by 2018, up more than 10% in just over a decade. Yet emerging markets still account for only 11% of global market capitalisation in the MSCI All Country World index.
Emerging market dividends per share growth has also outpaced developed markets dividend growth and outperformed emerging market earnings per share growth over the long-term.
