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Emerging Market Equities Saw Valuations Fall on Commodity Prices

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Dec. 4 2020, Updated 10:53 a.m. ET

Valuation movement

Emerging market equities are trading at 10.5x on a one-year forward earnings basis. Valuations fell by 0.97% in the week ending August 14, 2015. The fall was mainly due to the decline in commodity-exporting nations’ equities.

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China and Russia

China’s imports declined 8.1% and exports fell 8.3% in July 2015, compared with July 2014. Producer prices also contracted by 5.4% year-over-year, while consumer prices increased by 1.6%. The rise in inflation was driven mainly by rising food prices. Overall fundamentals have been deteriorating for China, resulting in the devaluation of the currency by its central bank. The People’s Bank of China has devalued the yuan in order to stem the decline in exports and support economic growth.

Russia’s GDP declined by 4.6% in the second quarter mainly due to declining oil prices (USO). Its economy has entered into a recessionary phase and recovery is not expected to be quick, as the nation’s growth is highly dependent on oil exports.

Historically, emerging market equities (EEM) have been valued at a discount compared to European equities (EFA) and US (SPY). However, these discounts have diminished over time due to the broad scope of growth in emerging markets.

Monetary measures

China has resorted to a series of interest rate cuts and fiscal easing in order to push for higher growth. The monetary easing should translate into industrial and service sector growth. However, China’s industrial production fell and growth slowed in fixed asset investments and retail sales.

Asset managers will have to redeploy their capital in the short to medium term to take advantage of the shifts across emerging market economies.

Asset managers that could benefit from emerging market equities’ strong performance include Franklin Resources (BEN), BlackRock (BLK), Fidelity Investments, Goldman Sachs (GS), HSBC Global Asset Management (HSBC), and Blackstone (BX).

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