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Emerging Market Equities’ Valuations Offer Buying Opportunities

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Valuation movement

Emerging market equities were trading at 10.7x on a one-year forward earnings basis as of January 22, 2016. During the week ended on the same date, valuations for emerging market equities rose by 1.4%. Equities are trading at a multiyear low on a price-to-earnings basis.

The rise was mainly due to China’s announcement at Davos, Switzerland, of more regulations in order to reduce volatility in equities and protect investor interests. China’s gross domestic product (or GDP) rose 6.8% in 4Q15 and 6.9% in 2015.

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China and India

China’s manufacturing activity fell in December. Its official PMI (purchasing managers’ index) stood at 48.2. This contraction has been continual, as the gauge stood at 48.6 in November. The Chinese yuan’s inclusion in the International Monetary Fund’s reserve currency system should bring benefits for China’s economy and global trade.

To date, China’s equities have fallen by 18.0% in 2016. They fell by 5% in 2015. Meanwhile, India’s equities saw their valuations fall. The nation’s GDP rose by 7.4% in 3Q15, higher than analysts’ estimates of 7.0%. India continues to see good growth in foreign direct investments in defense, industrials, and infrastructure.

Commodities drag

Saudi Arabia and Iran are pumping oil on a massive scale. Saudi’s Aramco, the state-owned oil giant, announced investment plans for the development of oil fields, reflecting higher oil production in upcoming quarters. Oil prices (USO) have fallen further as both countries are expected to boost their supplies in efforts to win market share.

Other commodities such as steel, copper, and metals have seen continuous falls in their prices as China’s manufacturing activity has fallen. Brazil’s GDP fell by 4.5% in 3Q15, while Russia’s GDP fell by 4.1% in 3Q15. This slowing growth has been mainly due to a fall in commodities.

Historically, emerging market equities (EEM) have been valued at a discount compared to European (EFA) and US equities (SPY). These discounts have continued over the past few months due to steep falls in commodities and emerging market equities. Asset managers will have to redeploy their capital in the short to medium term in order to take advantage of the shifts in these emerging market economies.

Asset managers that could benefit from strong performances by emerging market equities include Franklin Resources (BEN), BlackRock (BLK), Fidelity Investments Institutional Operations Company, Goldman Sachs (GS), HSBC Holdings (HSBC), and Blackstone (BX).

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