Emerging market trusts have not had the best of times in recent years, while the MSCI EM index has underperformed MSCI World by around 30% over the past two years. Emerging market volatility has also been high.
Still, looking at price multiples, it is clear that emerging markets are now extremely cheap not only on a historical basis but also when compared against developed equity markets.
Pau Morilla-Giner, chief investment officer at London & Capital, points out that Chinese equities are on a price earnings ratio close to 10-11x whereas the S&P 500 valuation reading is around 18-19x.
“For investors, especially global asset allocators, these lower valuations provide a cushion for disappointment, especially at a time when many other asset class valuations are stretched,” he says.
Whilst warning it is not quite time to rush into emerging markets, Morilla-Giner sees the economies as starting to show encouraging signs of stabilisation.
“Earnings growth visibility in emerging market regions is opaque and emerging market equities have traditionally shown a significant sensitivity to global economic growth, which we expect to be sub-par for the next twelve months,” he adds
“Therefore investors should be highly selective with their emerging market exposure, with a focus on Asia, where we see relative higher GDP growth and better long term demographics.”
With generalist funds from Aberdeen and First State now soft closed, the next big trend may well be for wealth managers to take back the reins on asset allocation across emerging markets, despite the greater risks involved.
