That’s the bad news. The good news is that much of the above has been reflected in market moves. For example, looking at forward price-to-earnings ratios the MSCI Emerging Market index is trading at around 10 times the next 12 months’ earnings. This is at a significant discount to both its history and to developed markets.
While these valuations are not yet at rock-bottom levels, they are not too far away. In the past 20 years or so emerging markets have traded at or above these levels 80-90 per cent of the time. Moreover, on the few occasions when emerging markets have been below these levels, the returns in the following 12-36 months have always been strong.
In addition, as a result of the significant devaluation of the currencies of a number of countries running large current account deficits, the exporters in these countries are now much more competitive and better positioned to benefit from any recovery in global growth.
Allan Conway is head of emerging market equities at Schroder Investments
A DESIRABLE INVESTMENT?
- The structural story is intact. Emerging markets continue to offer investors extremely attractive long-term investment opportunities, particularly given current valuation levels.
- The problem is that there remain a number of near-term headwinds and capital is, for now, flowing to the developed world.
- As a result of the significant devaluation of the currencies of a number of countries running large current account deficits, the exporters in these countries are now much more competitive and better positioned to benefit from any recovery in global growth.
