Macroscope | Premature to call the bottom in emerging markets

It was only a matter of time before the sharp sell-off in emerging market (EM) equities caused some stock pickers and strategists to declare that the bottom has been reached.

Goldman Sachs and Citi, two of the word’s largest investment banks, are now advising their clients that it is time to reassess the outlook for the much unloved asset class.

While Goldman Sachs believes it is “no longer obvious” that EM currencies will suffer further sharp declines, Citi notes that there is “a certain degree of resistance to a long dollar versus EM view.”

Other analysts are taking a longer-term view and are arguing that the returns of minus 5% for EM equities over the past five years (and minus 16% over the past year) have pushed valuations to a sufficiently low level - the benchmark MSCI EM index was trading at a valuation of less than 13 times 10-year average earnings at the end of September, slightly below its level during the 1997-98 Asian financial crisis, according to JP Morgan Asset Management (JPAM) - to make EM shares an attractive buying opportunity.

There is no question that the deterioration in market conditions in developing economies since the US Federal Reserve startled investors in May 2013 by announcing its plans to begin scaling back, or “tapering”, its asset purchases has looked and felt overdone. According to JP Morgan, since the first quarter of 2013 roughly half of the speculative inflows into EM bond and equity funds since the 2008 financial crisis have been redeemed.

Many EM currencies have fallen dramatically against the dollar over the past year, even those in countries with relatively strong fundamentals, such as the Colombian peso and the Polish zloty to a lesser extent.