2. Is it time to buy emerging market equities?
Other than commodities, EM equities have been one of the worst performing asset classes in 2015. The recent carnage has only added to their multi-year period of underperformance. As a result, EM stocks, as measured by the MSCI Emerging Markets Index, look fairly cheap on an absolute basis and very cheap relative to developed market equities, as measured by the MSCI World Index. With EM valuations at a significant discount and sentiment toward EM stocks extraordinarily negative, investors with a contrarian streak are wondering if it’s time to buy. My view: it depends. Selectivity in EMs is key. I like stocks in Asia (outside of China) as well as those in EM countries that have been embracing reforms, such as Mexico.
Market Realist – Some emerging markets look attractive, some don’t.
As mentioned in the previous part, the global equity rout created some pockets of value. The graph above compares the PE ratio (price-to-earnings ratio) of the MSCI Emerging Market Index (EEM) with that of the S&P 500 Index (IVV), along with their respective ten-year averages.
The former is trading at 11.8x earnings as of September 14, compared to its ten-year average of 13.4x earnings. Meanwhile, American stocks—which are trading at 17.3x—are still slightly expensive compared to their ten-year average of 16.5x earnings.
Commodity-importing economies, which are mainly emerging Asian economies, look relatively attractive. South Korea (EWY), for instance, is a beneficiary of lower commodity prices. Also, South Korea has a good current account situation, which would be handy if the Fed raises rates.
While India (EPI) is also a great beneficiary of lower commodity prices, difficulties in pushing key reforms is one of the main headwinds the economy faces. However, India’s long-term prospects look promising, given its young population and the demand-driven nature of the economy.