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Opportunities Galore in Emerging Markets

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Aug. 4 2016, Updated 9:06 a.m. ET

2. EM is actually outperforming.

Emerging markets have started to recover, with stocks up roughly 6% in local currencies and more than 7% after adjusting for the rebound in EM currencies against the U.S. dollar, according to Bloomberg data. Although these stocks have started to stabilize, valuations still appear inexpensive, particularly on a relative basis. The MSCI EM equity index is trading at roughly 1.35x book value, more than 50% cheaper than the S&P 500, as Bloomberg data shows.

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Market Realist – Emerging markets look attractive

After nearly a year, emerging market (EEM) stocks in July hit the highest level after chances of an interest rate hike by the Federal Reserve abated to a large extent. The MSCI Emerging Market Index has risen 8.2% since the end of May, while YTD (year-to-date), it has risen 10%.

Despite the uptick, the Market is still trading at a reasonable valuation, implying ample growth opportunities compared to developed markets. The MSCI Emerging Market Index is currently trading at a forward PE (price-to-earnings) multiple of 13.2x. On a PBV (price-to-book-value) basis, the index is at 1.4x.

In emerging markets, China (FXI), Taiwan (EWT), and Russia (ERUS) offer compelling forward PE multiples of 12.2x, 14.4x, and 7.1x, respectively.

Higher fund flows

The rally was also triggered by huge fund flows into emerging market (IEMG) equity funds. Data from EPFR Global show that $4.7 billion was invested into EM (emerging market) equity funds for the week ended July 20, 2016, the highest in a year. The Institute of International Finance estimates fund inflows worth $14.6 billion into the EM equity markets in July.

South Korea, Taiwan, and India remain attractive destinations in Asia. Brazil and Russia also attracted substantial inflows. Data from Bloomberg show that Brazil attracted $1.4 billion in July followed by India (INDA) at $1.3 billion. Russia saw inflows of $1.2 billion.

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