To buy or not to buy — that’s the question facing emerging market investors.
The sector is undoubtedly cheap – equity valuations are 30-50 percent cheaper than their 10-year average on a price-book basis; currencies have depreciated 15-20 percent in the space of 4 months and local bond yields have surged by an average 150 basis points. As we have pointed out before, cheapness is relative and the slowing economic and credit growth in many countries will undoubtedly manifest itself in falling EPS growth. Companies that cannot pass on high input costs caused by weak currencies, will have to take a further margin squeeze.
But many analysts have in recent days changed their recommendations on the sector. Barclays for instance notes:
Value has been created in EM local (debt) markets and the bulk of the global rates repricing should be behind us.
At Morgan Stanley they write:
Improved valuations and carry as well as signs of positive export growth momentum support emerging currencies near term.