Emerging Markets–More Attractive in 2017


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Global Equity FVMR Snapshot – February 2017


The consensus estimate for 2017 return on equity (ROE) has been adjusted upwards for Emerging Markets and is now at 11.9% (versus 11.2% in October 2016) and is expected to continue to improve in 2018.

Developed Markets have been adjusted slightly upwards as well to 2017 ROE of 12.8% compared to 12.6% in October 2016. US is still the reason that Developed Markets have higher expectations than Emerging Markets, Developed non-US have ROE expectations at only 10.4% for 2017.

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The division between academic economics and the way traders look at the market is deep. The efficient market hypothesis assumes that markets and valuations are always pushing towards an equilibrium, and evidence to the contrary gets pushed aside as fluctuations or statistical deviations. But the dot com bubble, the

US still has the strongest fundamentals and is the reason that Developed Markets have higher expectations than Emerging Markets, Developed non-US has ROE expectations at only 10.4% for 2017. Latin America is fundamentally strongest in Emerging Markets considering both ROE and dividend payout ratio (DPR).

Japan has the lowest expected ROE and lower DPR than Emerging Markets.


US increases the valuation of Developed Markets now trading at 2017 17.0x price-to-earnings (PE) and 2.2x price-to-book (PB). If we exclude the US, Developed Markets trade closer to Emerging Markets on PB. Developed non-US still trades higher on 2017 15.0x PE versus Emerging Markets at 12.2x PE.

Emerging Europe has a dirt-cheap valuation that drags down the valuation of Emerging Markets.

Looking at ROE/PB, we can see that Emerging Markets are more attractive at 2017 8.2% ROE/PB than Developed Markets at 5.9%. Most ROE for the price-to-book you pay you’ll find in Emerging Europe where you get 13.1% ROE for every unit of PB.

Emerging Markets trade at a PE-to-EPS growth (PEG) ratio of only 0.8 (a rule of thumb is that below 1.0 is cheap) while only Developed Asia trades at a PEG ratio below 1.0 among Developed Markets.


Consensus expects double-digit growth in earnings across the board for 2017, with Emerging Europe being the only exception. Emerging Markets are expected to grow faster than Developed Markets in 2017, with an expected earnings growth of 16.0% versus 12.6%.

The past 2W price performance has been strongest in the US and weakest in Emerging Europe. Looking at the past one year, most regions have returned about 20%, the main standout being Latin America that saw a price increase of 31%.


North America is the only region where gearing has increased in the past 12 months relative to 2015.

Price volatility in the past 3M has been higher in Emerging Markets; driven by volatility in Latin America and Emerging Europe. Japan has been the most volatile in the past 3M among Developed Markets and most volatile globally looking at the past 1Y.

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