It was already evident in the first and second quarters of this year that growth in China and other emerging markets was slowing. This explains the under performance of commodities and emerging market equities even before the recent turmoil. But the Federal Reserve’s recent signals of an early exit from QE – together with stronger evidence of China’s slowdown and Chinese, Japanese, and European central bankers’ failure to provide the additional monetary easing that investors expected – dealt emerging markets an additional blow.
Where Are We with Emerging Markets Valuations v/s Global Market Valuation
Morgan Stanley has recently published Country and Regional Index Performance Data.
A look at the MS Country and Regional Index Performance Data highlighted that emerging markets have underperformed the world index.
Right now Emerging markets trade at a PE of 11.5 compared to Europe at 14.5. Despite the great fear over the future of the Euro, the fear of investors in emerging markets equities seems to be higher.
Under performance set to continue
This is set to continue for two main reasons, argue analysts at Capital Economics.
First, even though Capital Economics does not expect the Federal Reserve to trim its quantitative easing program until September at the earliest, the research boutique thinks “an eventual scaling back of the U.S. central bank’s unconventional stimulus will hit EM equities disproportionately hard” as risk appetite is affected.
Second, emerging market economic activity is likely to be weaker than the market expects.
“Growth has disappointed over the past year, particularly in the Bric economies, largely because of structural changes, which are likely to keep growth lower in the future.”
Another point: continued U.S. dollar strength should hurt EM commodity stocks.
However, at prices like these, the sell off brings some great buying opportunities.