Over the past year emerging markets have broadly lagged an upswing in global equity markets, yielding cumulative returns of 4.5 percent since last August. That’s less than half the return developed markets have provided (see graphic below).
But there are two reasons why a turning point may be approaching. First the positioning. Foreign holdings of emerging equities have plunged in the past six months and according to research by HSBC they are at the lowest in four years. That’s especially the case in Asia, where fund managers have been jittery about China’s growth slowdown.
International funds appear to have responded aggressively to signs of a slowdown in emerging market economies, the bank observes, adding:
This could be a positive signal for emerging equities if economic conditions subside…particularly for Asian markets where holdings are lowest.
Valuations are the other attraction. Emerging equities are trading around 10 times forward earnings —a fifth below developed market peers. In China, which comprises about 18 percent of the main MSCI emerging equity index, valuations are near record lows. EM valuations have been “sustainably lower” only back in 2002 or during the depths of the 2008 crisis, notes James Bristow, who runs a global equity portfolio at U.S. asset manager Blackrock in London.