Emerging markets have long held the allure of rapid growth potential and diversification benefits, but investors have often been burned by the volatility and structural risks associated with them.
However, with changes in economic fundamentals and global financial dynamics, a reassessment is warranted. So are emerging markets a market after all?
According to Sevens Report analysts, emerging markets may indeed be approaching an opportune time for investors to re-enter.
Several factors suggest that these markets are not only cheap but also poised for a potential rally. One of the main reasons is the current valuation.
The MSCI Emerging Markets Index has a forward price-to-earnings ratio of 11.9, well below that of developed markets such as the MSCI USA Large Cap Index at 22.1 and the MSCI EAFE Index at 14.0.
This significant discount makes emerging markets attractive from a value perspective.
Investor sentiment, often a contrarian indicator, further strengthens the case. Sevens Report analysts point out that emerging markets are widely “hated”, evidenced by the dismal stock flows in these regions.
While US equity inflows through August totaled $329.3 billion and international developed markets saw inflows of $38.6 billion, emerging markets managed just $4.3 billion.
This extreme lack of enthusiasm, coupled with devaluation, may be the contrarian signal investors are looking for before the climate changes.
Another positive sign is the recent performance trend. Emerging markets have outperformed both the S&P 500 and the MSCI EAFE index over the past two quarters.
This solid performance amid uncertainty in global markets suggests the sector may be in the early stages of a sustained uptrend.
Looking deeper, there are several macroeconomic catalysts driving this optimism. China and India, which account for nearly 50% of major emerging market indices, are at the forefront of these developments.
In China, policymakers are rolling out a series of stimulus measures aimed at reviving economic growth. These include interest rate cuts, reductions in bank reserve requirements, and other fiscal stimulus will follow.
Meanwhile, India’s demographics provide a huge corridor for growth. With a growing population, especially in the younger age group, and political stability under the Modi government, the country is poised for long-term structural growth.
These factors align with broader global changes. Interest rate cuts in major economies lower the value of the US dollar, which historically benefits emerging markets.
In addition, the trend toward supply chain realignment—where companies “close” or “kiss” their production closer to home or politically aligned regions—could further benefit emerging markets.
For those considering entering the space, the Sevens report outlines various investment vehicles, including ETFs that offer diversified exposure to these markets.
The Vanguard FTSE Emerging Markets ETF (NYSE:VWO), for example, provides broad, low-cost exposure, while the WisdomTree Emerging Markets High Dividend Fund (NYSE:DEM) focuses on income-producing assets within emerging markets.
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Reference;
Acharya, N. (2024) Are emerging markets finally a buy? By Investing.com, Investing.com. Investing.com. Available at: https://www.investing.com/news/stock-market-news/are-emerging-markets-finally-a-buy-3659943 (Accessed: 13 October 2024).
