In terms of five-year averages Russia is the most attractive market of the four – approximately 40% undervalued, while China is approximately 35%, India 21% and Brazil 16% undervalued, HSBC continued. (All figures are from Friday 18 May and discounts have widened even further since then.)
Speaking at a presentation, Philip Poole, global head of macro and investment strategy for the group said that now, when valuations are so depressed, is not the right time to sell out of emerging markets.
So far this year EMs have had a sharp rally (in Q1) followed by an equally sharp correction as risk aversion returned towards the end of March.
This has historically been the case in these markets, which have large asset flows from foreign investors who have a tendency to bring their money home when sentiment turns sour.
For this reason, investing in EMs and Bric countries will always be a high beta play, Poole admitted, but when EMs have slid back twice as much as developed markets like the US, they almost certainly bounce back twice as strong once the rally begins.
Ignore the bears
Nick Timberlake HSBC’s head of equities UK and global head of EM equities, said: "There is a lot of bearish information out there about what is taking place in the world. Today, uncertainty levels are about as high as they ever get and when this kind of noise surrounds markets often the only thing you can focus on is valuation.
"I say the risk reward is very much in your favour investing in a time like this. It is always when you have these moments in time there are 20 reasons that trip off your tongue as to why you should not invest and virtually no reasons apart from valuation when you should do it. Those are always the times you will make money."
Time to get in?
He explained that in the past when valuations in EMs have been as low as they are today, the subsequent 12 months have always made investors money.
Following this rationale, timing is clearly key, and longer-term investors should be prepared for inevitable volatility along the way.
What makes now a compelling time to invest in the various Bric markets, Timberlake and Poole continued, is the profitability of corporates, which they argue is more correlated to the fate of their respective stock markets than GDP growth.
At the moment companies in the four Bric nations (Brazil, Russia, India and China) are trading at an average of 9.3x earnings against a historic average of 13x earnings.
Breaking this down further, Russia is again the cheapest market – trading at 4.3x earnings, while China, Brazil and India are at 8.2x, 8.5x and 12x respectively.
Of the four nations Russia is HSBC’s favoured market on this basis, while Brazil is its least favourite.