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Excerpts:
“Following an almost 30% drop (in US dollars terms) between end-April and end-September 2011, the MSCI Emerging Markets (EM) equity index has been trading sideways, with no clear direction. It has since become consensual to maintain an underweight exposure to the asset class (…) However, today, the case against emerging markets within an equity allocation is weakening.”
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“Over the past three years, emerging countries have been on the wrong side of the global rebalancing process, whereby excessive investment in those economies and high exports destined for the Western world were being wound down, leading to reduced growth differentials with developed countries. This economic adjustment is now coming to an end and, with it, the de-rating in emerging-market equities relative to their developed counterparts is almost complete. In addition, while the monetary easing cycle in the developed world is maturing, admittedly creating fears that less liquidity in the West will hurt EM, we must not overlook the fact that the tightening cycle in emerging economies is maturing as well!”
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“Combining all these considerations provides us with an economic fundamentals ranking of emerging countries. Of course, a valuation overlay should be applied before considering investing, as equity indices in countries like Mexico, the Philippines, Thailand and Malaysia look expensive, while they are cheap in China, Colombia, Chile and Russia, and closer to fair levels of valuation in Poland, India, Indonesia, Turkey and Brazil. Countries that are economically weak and expensive, like South Africa and Argentina, should be avoided. As a whole, among the bigger regions, (given the difficulty of investing in small markets with limited liquidity), we would therefore favor Asia, and in particular China, where valuations are cheap.”
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