2 weeks Ago By Acutel
Emerging markets equities outpaced their developed market counterparts in the third quarter, gaining 8.7% compared to a 6.4% rise in developed markets.
This, according to Lazard Asset Management, marks two consecutive quarters of emerging market outperformance for the first time since 2020. The firm’s research team argues in a new analysis that, despite this recent rally, emerging market stocks remain historically undervalued and could see further gains. “The positive shift began as the Federal Reserve cut rates in mid-September, and outperformance accelerated in the final week of the quarter as China unleashed a series of stimulus measures,” Lazard’s research team wrote.
“In our view, EM equity is one of the most mis-priced asset classes globally, with valuations remaining very inexpensive compared to DM equity.” Pointing to data from September, they note that emerging market equity was trading at a forward price-to-earnings multiple of 11.6x, compared to 18.
6x for developed markets and 21.5x for the United States. “Over time, this nearly 40% valuation discount relative to DM, compared to a 25% historical average discount, may narrow due to stronger EM earnings growth, recovering EM profitability, attractive free cash flow yield and dividend yield , and a widening economic growth premium in EM’s favor.
” Lazard's Outlook on Emerging Markets, October 2024 Our outlook is constructive for emerging markets equities due to: – higher economic growth – improving corporate earnings – global monetary easing – steep valuation discounts $VWO $EEM https://t.co/F9jhAGYj27 pic.twitter.
com/3rtCytiK7P China, India, And South Africa Lead The Charge Some of the best returns in emerging market stocks this year have come from companies listed in China, India, and South Africa. Chinese equities rallied thanks to massive monetary stimulus by authorities keen on reviving the lethargic economy while Indian stocks hit record highs in September in what analysts describe as one of the strongest bull runs in at least 20 years. According to Nitin Chanduka , a strategist at Bloomberg Intelligence, the NSE 500 index, which tracks the 500 largest stocks in India, has set a two decade record for the longest period without a 20% correction from its peak.
This contrasts sharply with the 2003-2007 bull market, during which the index saw at least three declines of over 20%. Chanduka attributes the current bull run, which commenced during the pandemic lows of 2020, to strong domestic liquidity, a robust earnings cycle, and improving profitability. Meanwhile, strong stock market performance in South Africa has been fueled by renewed optimism following the formation of the country’s first coalition government since the fall of apartheid.
This political shift, which has brought business-friendly parties into the fold, has spurred a wave of new investments and boosted sentiment towards Africa’s largest economy. Chinese, Indian, and South African stocks have enjoyed strong returns YTD; source: Seeking Alpha BlackRock’s exchange-traded funds (ETFs) tracking public equity markets in China, India, and South Africa have delivered impressive year-to-date returns. Chinese equities (FXI) have surged by 32%, Indian equities (INDA) have gained 12.
09%, and South African equities (EZA) have risen by 18.88%. Rate cuts and US elections are key catalysts The US Fed’s recent rut cut is seen as a positive catalyst for emerging market equities, as a weaker dollar benefits emerging market economies.
Historically, Fed easing cycles have been particularly supportive for emerging market equities, especially when not followed by a recession. “With the US Fed’s first rate cut, investors are increasingly looking at the potential of EM equities. Historically, since 1989, EM stocks have outperformed developed markets (DM) during easing cycles, particularly in non-recessionary environments, ” say strategists from Julius Baer.
With the US having seemingly avoided a recession, the outlook for emerging market stocks indeed appears strong. However, the strategists caution that US elections pose unique risks for emerging market equities. “US elections are potentially more relevant for this asset class outlook, as protectionist measures by candidates could be particularly harmful.
We see no need to rush into EM equities and wait for further evidence of a soft landing, fading US election risks, and a weaker USD.” Republican candidate Donald Trump , who has in recent weeks risen in opinion polls against Democratic nominee Vice President Kamala Harris , has promised to raise tariffs on imports from China and pursue an America first policy to boost domestic industries. Such policies could dampen the outlook for Chinese equities, pulling down emerging market performance.
OUCH! Donald Trump is pitching a 60% tariff on all Chinese imports. That would shrink a $575bn trade pipeline to practically nothing, Bloomberg analysis shows. For China’s econ and its slumping stock market — down >40% from its 2021 high — that’s bad news.
Worse, Trump’s rhetoric...
pic.twitter.com/rVTlHARC9K Emerging Markets’ Debt Burden Poses Risks Despite a new cycle of rate cuts, borrowing costs in emerging economies remain at their highest levels in decades for governments, businesses, and consumers alike.
Moreover, many emerging market economies are grappling with high debt burdens and limited fiscal space, leading to widening deficits and increased demand for credit. Unsurprisingly, quite a few have suffered rating cuts by global credit ratings agencies, meaning that lower central bank rates will not automatically translate into lower borrowing costs. In numerous emerging market countries, tax revenues are insufficient to cover rising debt servicing costs, resulting in increased political volatility as financially strained citizens resist further taxation.
Widening deficits, high borrowing costs and depreciating local currencies have also heightened the risk of governments defaulting on their foreign currency debt. Notably, S&P Global noted in October that higher debt burdens and borrowing costs could lead to more frequent defaults on foreign currency debt by emerging market governments over the next decade compared to the past. Carlos Cardenas , Head of Latin American Insights and Analysis at S&P Global Market Intelligence, warns that emerging markets will navigate an evolving geopolitical landscape characterized by unresolved conflicts and ongoing disruptions.
“These countries must adapt to a world where policymakers–particularly within advanced economies–seem less willing to embrace limitless trade and globalization, adding complexity to emerging markets’ growth prospects,” he noted. Geopolitical uncertainty, currency depreciation, and the rising risk of sovereign debt defaults mean that investors should be selective about which emerging market stocks or ETFs they add to their portfolios. Companies in countries facing macroeconomic and political instability may prove to be poor investments, despite overall optimism about emerging market performance.
That said, diligent investors can still achieve strong returns, particularly in emerging markets with favorable demographics. “Over the long term, powerful mega forces like youthful demographics and rewiring supply chains could favor certain emerging markets countries like India and Mexico,” notes Jay Jacobs , U.S.
Head of Thematic and Active ETFs at BlackRock. “While many advisor portfolios are underweight emerging markets, the current macro environment appears to offer many opportunities across EM. Advisors may want to consider more granular exposures within emerging markets to target the most compelling opportunities,” he wrote.
Author: Acutel We are global investors who invest in good companies at fair valuation and speculate on all else subject to the risk exposure we can afford. The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organisations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
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