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According to ASK Private Wealth report, emerging markets (EM) look promising on account of robust markets, good earnings per share (EPS) growth, supportive policies and favourable valuations.
The MSCI Emerging Markets Index includes companies that span across 24 developing countries which are Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. Let’s understand how:
- EM equities performed complementary to developed markets (DM) and inversely with Dollar: On an average, the emerging markets (EM) equity has historically outperformed the developed markets (DM). Recently, EM has been underperforming while the DM has been rallying, so EM has a potential of picking up now.
- Earnings picking up for EM: Emerging markets were earlier lagging U.S dollar. The major reason for this is underperformance from earnings growth side and strength of the US dollar, which is in inverse relation with the EM. But the tide is turning in recent times.The companies having earnings growth of at least 10% a year or more represent more than half the index in EM and a higher proportion of the EM index weight is in companies with more than 30% EPS growth, when compared with the US market.
- Policy space and outlook is more favourable for EM: EM have lower inflation rates compared to DM, which makes it more attractive. Also, China, over the last 5 years, has had a biggest share in MSCI-EM index. In 2023, China accounted for a large part of the underperformance of EM against S&P500. But its weightage has been coming down, reducing the drag on overall performance going forward.
- EM valuations look promising: Emerging markets are showing valuation close to the average making them ideal for investments
