Emerging Markets Still Look Relatively Cheap

Emerging Markets Still Look Relatively Cheap

Global Equity FVMR Snapshot

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Fundamentals: US drives Developed markets’ profitability

Global markets have a return on equity (ROE) of 12.8% and a 42% dividend payout ratio (DPR). Emerging markets and Developed markets seem to be pretty much on par in terms of profitability with ROE of 12.3% and 12.9% respectively.

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If we look at Developed markets excluding US, we can see that ROE is only at 10.6%. North America (of which US is the lion share) is, in fact, the only region that has a higher profitability than Emerging markets.

Only Latin America has a dividend payout ratio that is close to the Developed markets’ average. Overall, companies in the Developed markets pay out a larger share of their earnings as dividends.

Valuation: Emerging markets are relatively cheap

Since April, the price-to-earnings (PE) of global markets has increased to 16.8x from 16.4x. Emerging markets still look relatively cheap on PE, even if we exclude US that has the richest valuation at 19.0x PE for 2017.

Looking at price-to-book (PB) Emerging markets still look relatively cheap. However, Developed non-US actually trades in line with Emerging markets at 1.6x PB. Taking ROE into account, Emerging markets still appear more attractive than Developed non-US as Emerging markets have higher ROE.

Momentum: Asia and Latin America have the best earnings growth prospects

For 12.9x PE in Emerging markets, you get 20% earnings per share (EPS) growth. While in Developed markets, you have to pay 17.5x earnings to get 11.8% EPS growth.

While the US increased Developed markets’ profitability and valuation the impact on EPS growth is the opposite. Developed non-US has a higher expected EPS growth at 13.0%.

Asia, independent of if it’s Developed or Emerging, and Latin America have the best earnings growth prospects in 2017. All these regions are also trading at PE ratios below the global average.

In terms of the past one year’s price performance, Emerging markets have returned 19.1% versus Developed markets at 14.5%. If you go by geography, you can see that Asia has been the best region in the past year. Emerging Asia has had the best return at 23.7% followed by Japan at 22.4% and Developed Asia at 19.4%.

Risk: Latin America and Emerging Europe are most volatile

Finally, we can see that the gearing measured as net debt-to-equity is lower in Emerging markets. It’s mainly North America and Developed Europe that have high gearing as Japan and Developed Asia have a gearing that is actually slightly below Emerging markets.

If we look at volatility at the Emerging markets’ level versus the Developed markets’ level, these two are pretty close to each other. Emerging markets have been about 2ppts above Developed markets over the past three months and past one year.

However, if we were to exclude US, Developed markets have actually been more volatile than Emerging markets in the past three months. Among Emerging markets, it’s also noteworthy that Latin America and Emerging Europe drove volatility in the past three months and past one year. Volatility in Emerging Asia has been similar to Developed non-US.

Article by Dr. Andrew Stotz, Become A Better Investor

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Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company providing institutional investors with ready-to- invest portfolios in Asia that aim to beat the benchmark through superior stock selection. The company also provides buy- and sell-side clients with financial models to value any company in the world and World Class Benchmarking to determine what companies are financially world class. Previously, as Head of Research at CLSA, Andrew was voted No. 1 Analyst in Thailand in the Asiamoney Brokers Polls for 2008 and 2009. He was also voted No. 1 Analyst in Thailand in the 2009 Institutional Investor magazine All-Asia Research Team Report. Andrew earned his PhD in finance at the University of Science and Technology of China in Anhui province, with a focus on answering questions raised by fund managers and analysts during his career about picking stocks and managing portfolios. In addition, Andrew has been a lecturer in finance for 22 years at various universities in Thailand. Since 2013, he has been the president of the CFA Society of Thailand. He is also the author of How to Start Building Your Wealth Investing in the Stock Market.

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