Has the worm turned for EM equities

Emerging market equities may be losing their shine following months of under-performance and a decline in sentiment towards the region, but investment professionals are still split on their prospects.

Has the worm turned for EM equities


Concerns over slowing economic growth in the region, a potential bubble forming in emerging markets assets, and the possible reduction of the quantitative easing measures that have propelled asset prices higher could all have contributed to the decline in the appeal of the asset class.

Performance, meanwhile, has dropped off in the first three months of the year, especially when compared with that of developed market equities. The MSCI Emerging Markets Index is down 1.6%, with the regional Latin America and EMEA indices both being down 2.7% over the period. This is compared to an increase of 8.4% in the MSCI World Index.

John Higgins, senior markets economist at Capital Economics, said: “Underperformance in the current market is surprising because historically emerging market equities performance has generally worsened during a time of a worldwide crisis, for example the dotcom crash, or the 2008 downturn.

“This performance slump started at a time when the market was relatively calm, investor sentiment was improving in the US, and the eurozone was less volatile.”

Goldman Sachs’ recent Over the Horizon report, meanwhile, indicates there could be further difficulties ahead as returns are more likely to be in the 5% to 10% range, rather than the predicted 13% touted by some analysts, which could leave investors disappointed.

The report said: “As much as EM equities are likely to generate a positive return this year, we do not think they offer a compelling tactical opportunity at this time, particularly in light of their significant structural fault lines.”

Not all bad news

Some experts are still championing emerging market equities, however, especially for investors looking at the long term.

The Goldman Sachs report said: “This is not to suggest that emerging markets are devoid of equity opportunities. Both India and China are more attractively valued than EM overall, offering about 15–20% upside to their historical average valuations. In addition, Chinese earnings expectations have fallen further than any other emerging market, setting a lower hurdle for positive surprises in the future. With leading growth indicators in China also improving, the pieces for a tactical overweight are coming into focus.”

Tom Becket, CIO at Psigma, said: “We would suggest that it is time to start re-examining opportunities in EM equities, particularly truly unloved markets such as China. Valuations in China have fallen sufficiently to at least partially compensate for the myriad of risks that exist in the Middle Kingdom. We added a China fund to our portfolios late last year and believe that it could be a strong “value performer” in the years ahead.”


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