Currently, emerging market equities are trading at 12.7x on a one-year forward earnings basis. The valuations declined by 2.50% in the week ending May 29, 2015. The drop was due mainly to weak macro economic data, a decline in commodity prices, and slipping demand.
Historically, emerging market equities (EEM) have been valued at a discount when compared to US (SPY) and European equities (EFA). However, these discounts have diminished over time due to the broad scope of growth in emerging markets.
European and US equities declined during the week. Emerging markets fell on growth concerns due to a slowdown in China’s economy, which is affecting commodity exporting nations like Brazil and Russia.
The HSBC China flash manufacturing PMI (Purchasing Managers Index) fell from 49.3 in April to 49.1 in May, the third straight monthly contraction and the fifth in six months. China’s export orders also dropped to a 23-month low, reflecting a major structural shift in the economy.
Asset managers will have to redeploy their capital in the short to medium term in order to take advantage of the shifts across emerging market economies.
Asset managers that could benefit from the strong performance of emerging market equities include BlackRock (BLK), Fidelity Investments, Franklin Resources (BEN), Goldman Sachs (GS), HSBC Global Asset Management (HSBC), and Blackstone (BX).
The weak data have forced policymakers to roll out a variety of stimulus measures to revive China’s real estate sector. These include boosts for bank lending and lower down payments for property buyers.