Macroscope | China to South Africa, an emerging opportunity but risks remain
For the first time since the US Federal Reserve triggered a sharp sell-off in emerging markets (EMs) in May 2013 by signalling an end to its programme of quantitative easing (QE), a growing number of investment strategists are sounding more sanguine about the prospects for developing economies.
All of a sudden, one of the dominant macroeconomic themes for 2016 is whether it is finally time for investors to start increasing their exposure to EMs.
From a valuation standpoint, there is a compelling case to be made that EM equities have reached a bottom and now represent a buying opportunity.
Between September 2014 and late January of this year, the MSCI EM Index, one of the main gauges of the performance of EM stocks, plunged 37 per cent in dollar terms (with half of the decline occurring over the past year). During this period, the benchmark US S&P 500 index has fallen by a meagre 1.4 per cent.
According to JP Morgan, a staggering US$64 billion gushed out of EM equity funds last year, following outflows of US$28.5 billion in 2014.
READ MORE: Premature to call the bottom in emerging markets
EM stocks are now “exceptionally cheap”, according to Research Affiliates, a sub-adviser to Pimco, one of the world’s largest asset managers. The cyclically adjusted price-earnings ratio fell to 10 in late January – only the sixth time in the last 25 years that the measure has fallen to (or dipped below) 10, making “the exodus from [EMs] a wonderful opportunity – and quite possibly the trade of a decade – for the long-term investor”, according to Research Affiliates.