According to the latest Valuations Index from The CFA Society of the UK, just 22% of its surveyed members believe emerging markets to be overvalued, while 43% say markets are ‘somewhat undervalued’.
The efforts David Cameron has gone through this week to cement ties with India, the “great phenomenon” of this century, show how important it is for us in the UK to share in its ascent.
The beginning of the Chinese New Year brought further coverage about its rise to prominence as the world’s second-largest economy, while the countdown to the next World Cup and Olympics will spark more debate about Brazil’s prospects.
Mixed fortunes
Of course, economies and markets are very different things. The MSCI EM Index has seen mixed fortunes in recent months, though is up 7% in the past 12 months. Over three years, the index is up 24%, though has actually been beaten by the MSCI World, which climbed 36%.
Is this the justification for saying developed markets are overvalued and emerging markets more fairly priced? There are arguments either way, but it’s the nature of emerging market equities that there are big risks on the downside.
In its latest monthly report on the asset class, Raiffeisen Capital Management makes the case that the relatively stronger price performance in the emerging markets compared to the established equity markets has come to an end, at least for now.
“The sub-average performance of the emerging markets in the midst of extremely positive risk sentiment at the global level should be taken as a warning sign, at least for the weeks and months ahead,” the report says.
Weak materials
“This is even more so the case, because share prices of small caps (which are generally very dependent on domestic economic performance) in the emerging markets have performed significantly weaker than those in the established industrialised nations. The materials and industrials sectors were among the weakest equity market segments in January, and for several months no tangible gains have been registered in prices of industrial metals, which are very sensitive to economic growth developments.”
As these market segments should number among the main winners during any stronger economic upturn in the near future, Raiffeisen analysts say that the relatively lacklustre price performance can also be interpreted as another warning sign.
Of course, for every emerging market bear there’s another five bulls and if equities really are as undervalued as they believe, then they should invest now. For my ISA, I think I’ll pass for the time being… and so will my mum!
