There are several reason for this optimism. The global Purchasing Managers’ Index (PMI) – a measure of industrial activity – appears to have bottomed out.
ET Intelligence Group: After underperforming the developed markets (DMs) over the past decade, emerging market (EM) equities are expected to reverse the trend in 2020 thanks to relatively cheaper valuations and an anticipation of a better earnings growth. Global investors are raising their allocations to EMs relative to the benchmark allocations, going overweight on the pack.
Emerging markets, which contribute nearly half of the global GDP, delivered 14 per cent dollar-denominated returns compared with 101 per cent gains posted by DMs in the past decade.
CLSA’s Laurance Blanco said in a note, “Historically, the regional and EM structural bear durations last for 10-16 years, which means we are that much closer to the initiation of the next structural bull market phase.” The brokerage expects 14 per cent return from the MSCI EM index for 2020.
There are several reason for this optimism. The global Purchasing Managers’ Index (PMI) – a measure of industrial activity – appears to have bottomed out. Historically, the EMs outperform by a wide margin when the global PMI recovers. In addition, analysts expect earnings recovery in the EMs. The consensus EM earnings growth is expected to be 14 per cent compared with 9 per cent for the DMs for 2020. EM earnings growth has been nearly half of the DM in the last 10 years.
Valuations, too, are in favour of the EMs. They are at the level of the Asian crisis in 1997. Based on the cyclically adjusted price-earnings (P/E) multiple called Shiller PE, EMs trade at 13 times their one-year projected earnings, which is at a 24 per cent discount to the DM valuation.
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The dollar trajectory is critical for the EM equity index performance. Any appreciation of the dollar results in the EM underperformance. The dollar has appreciated for eight years in a row. On an average, the dollar bull cycle lasts for seven years. Some economists believe that the dollar is overvalued by 15 per cent based on the purchasing power parity (PPP) index. Credit Suisse in its 2020 outlook said that EM equities typically outperform when their currencies appreciate and when that happens, inflation and interest rates fall.
The US-China tariff war has roiled EMs in the past few months. However, the trade tensions may ease ahead of the US presidential elections later in 2020. US President Donald Trump is expected to give some concessions on agricultural tariffs to China to win four agriculture-focused swing states in the US.
India has about 9 per cent weight in the MSCI EM index. In 2019, foreign portfolio investors (FPIs) invested nearly $14 billion in Indian equities.
