During the recent 2-year rate hiking cycle, emerging markets (EM) equities were resilient but underperformed developed markets (DM) by ~25%. As the global economy slows to a more normal run rate, a number of drivers point to a potential opportunity in emerging market stocks going forward.
Diversification from U.S. stocks. As economic data slowed in Q2, EM stocks outperformed their DM counterparts by 1.3% during the quarter. EM ex-China equities showed resilience, with India and Southeast Asia equities doing well. Year-to-date, 74% of the 50 best-performing stocks globally are outside the U.S., and the majority of those are Em names.
Attractive valuation and accelerating earnings growth. EM equity valuation remains at multi-year lows with the gap between EM and DM equity valuations widening. On a forward price-to-earnings multiple, EM is trading at 12.0x compared to 20.7X for U.S. equities as of June-end. On the earnings side, following a sharp decline in 2021 and 2022, growth expectations have moved higher for EM. Consensus earnings growth for 2024 is almost 17% in EM, compared to 11% in the U.S.
Global monetary easing and structural change can be tailwinds. A rate-cutting cycle is likely to bode well for EM equity assets. A weaker dollar lowers borrowing costs and improves the balance of payments position for EM firms. We have seen examples of countries (such as India, Poland, and Brazil) making efforts to diversify their economies and establish improved regulatory and fiscal frameworks that will lead to faster growth. Importantly, EM market composition is shifting with India, Taiwan, and South Korea now making up 50+% of the MSCI Emerging Markets index as of July end. Previous year concentration in Chinese equities is decreasing materially, making the region more attractive for global investors.
Though election results and geopolitical tensions will continue to be ever-present, we are constructive on emerging markets given the above fundamental backdrop.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.
Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The MSCI India Index is designed to measure the performance of the large and mid cap segments of the Indian market. With 109 constituents, the index covers approximately 85% of the Indian equity universe. The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 738 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.
