Many emerging nations have experienced dramatic improvements over the past several years. Yet, despite these positive developments, investors are sometimes reluctant to invest in emerging markets, believing them to have much greater risk versus developed markets. We believe it’s time for investors to look closer at some common concerns and possible misconceptions about this asset class.
Look closer: Political risks have changed significantly across the globe.
Investors may be worried about the level of political risk associated with emerging markets. But many emerging nations have established more stable governments with reform-minded leaders; India and Indonesia are just two examples of this increasing political stability. Meanwhile, the developed world is facing political uncertainties as populism gains popularity in reaction to the vast divide between the haves and have-nots.
Reform progress across states in India
Source: World Bank & Indian Department Of Industrial Policy And Promotion, 2015. For illustrative purposes only.
Look closer: A strong US dollar isn’t the threat that it may seem.
Some investors believe the US dollar will remain strong as interest rates follow a gradual path upward. While we do not agree with this view, continued dollar strength doesn’t necessarily have a negative impact on emerging markets. In fact, emerging-markets stocks have historically outperformed their developed-market counterparts during a majority of recent US Federal Reserve (Fed) tightening cycles. Additionally, emerging nations have made significant strides in reducing their current account deficits, which helps them become less reliant on US dollar-based debt.
MSCI emerging markets (EM) vs. developed markets (DM) stock market performance during past Fed tightening cycles
Sources: Thomson Reuters Datastream, Aberdeen Asset Management, May 2017. For illustrative purposes only.
Past performance is not a guide to future results
Additionally, since 2013 many emerging nations have made significant strides in reducing their current account deficits, which has helped them become less reliant on US dollar-based debt.
No longer so fragile: changes in the “Fragile Five”
Real Interest Rates = Policy rate minus inflation
Sources: IMF, Haver, CEIC, Emerging Advisors Group, EMED, Bloomberg, March 2017.
For illustrative purposes only.
Look closer: The rally in emerging markets isn’t over yet.
While some might assume that they have already missed the rally of the last 15 months, emerging markets are just now recovering from years of underperformance, especially compared to developed markets. We believe that, in general, the economic and earnings cycle has bottomed in emerging markets, and would expect to see a pick up into 2018 and beyond. Since 2013, share prices in emerging markets have been moving more on macro news rather than corporate fundamentals. We believe investors are now starting to focus on the improved fundamentals and the attractiveness of the asset class from a valuation perspective.
Despite the rally over the last 15 months, emerging-markets equities still look attractive. They are currently trading at a nearly 9% discount to their 10-year average price-to-book ratio, but at a significant discount to developed markets and in particular the US, which is trading at a nearly 25% premium to its 10-year average price-to-book ratio. And in the last year, fund flows have turned positive.
Dedicated EM Equity Fund Flows (US$ billions)
Estimates collated from weekly AuMs for reference. Numbers do not add up to YTD total, which are tallied using monthly AuMs. Source: EPFR Global, Morgan Stanley Research, data as of March 29, 2017. For illustrative purposes only.
Emerging markets currently have attractive valuations
Source: RIMES, MSCI, Morgan Stanley Research, data as of April 12, 2017. For illustrative purposes only. Earnings have also improved and are set to continue to have positive forward guidance as we see a cyclical pickup in emerging markets.
MSCI annual earnings per share (EPS) growth
Sources: IBES, MSCI, UBS, April 2017. For illustrative purposes only.
Past performance is not a guide to future results
- Economic fundamentals are improving
- Earnings are being revised upward
- Valuations are attractive
Aberdeen knows global emerging markets. After all, we’ve been investing in these markets for more than 30 years. We look for companies with strong balance sheets, solid company management and a commitment to corporate governance. We believe that the fundamentals of a company are the most important indicator for its success. And in our view, the current return to a focus on fundamentals bodes well for our bottom-up approach to investing.
The value of investments and the income from them can go down as well as up and you may get back less than the amount invested.
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