If we go by the MSCI emerging markets index, often used as the benchmark for emerging market equities funds, a bounce-back began in March this year and a relatively rapid improvement ensued up until the end of July.
In late July there was a small fall back down however it is too early to tell if this is a change in the direction of travel or just a blip.
Cofunds remain bullish on emerging markets, saying this week there has been a ‘seismic shift’ in attitudes towards the sector, with Q2 net sales up 159.6% from the previous quarter. It also found that 43% of advisers it questioned describe their outlook for the emerging markets sector as ‘optimistic’.
Behind the improvement in sales is a stronger belief in China and in commodities, Cofunds said. The number does of course mean that 57% of advisers were something other than optimistic, it should be noted.
Indications coming from other equity market research suggest there is plenty of value out there in emerging markets at this early stage in the recovery, particularly relative to most developed markets.
Morningstar’s latest quantitative price versus fair value ratio analysis found that most developed market countries are overvalued. The US and most European countries plus Japan had positive ratios of between 1 and 10, indicating equities are overvalued in those countries in aggregate terms. Only the UK bucked this trend with a ratio of -0.5 indicating British equities are still marginally undervalued.
In contrast, most emerging market nations were found to have negative ratios by the same measures with Brazil at -5.5, Russia at -6.4, and China at -1.1. Of the BRIC countries only India was found to be overvalued by Morningstar’s methodology, perhaps showing that the election of Modi and the positive sentiment coming from it has been overplayed.
South Africa, Chile and Mexico also had positive ratios which further demonstrates that the picture is far more nuanced than simply being able to say emerging markets as a whole are still undervalued.
In fact, in another piece of research published this week, only 50% of investment professionals said they believe emerging markets assets are undervalued in overall terms. This is a surprising number given the recovery in sentiment on the asset class is only a few months old after a long period of falling valuations and outflows.
Perhaps of more concern is that the CFA Society survey found that the enthusiasm for emerging market stocks is dropping off already, as last quarter 57% of those responding said the asset class was undervalued.
Overall it seems there is plenty of life in the emerging markets rebound and many buying opportunities to be found if the right countires are targeted.
However there is a hint of added uncertainty creeping in and further deterioration of the global geopolitical situation or a bad market reaction to future US monetary policy measures could derail the nascent recovery.
