A growing interest in emerging markets has often attracted investors due to their potential for rapid growth and diversification. However, these markets have also brought challenges, including volatility and structural risks, which have resulted in significant losses for some. With recent shifts in economic fundamentals and global financial dynamics, a re-evaluation of these markets may now be necessary.
According to analysts at Sevens Report, the current conditions could present a promising opportunity for investors to re-enter emerging markets. Several indicators suggest that these markets are not only undervalued but may also be on the verge of a recovery. One of the primary reasons behind this is the favourable valuation. The MSCI Emerging Markets Index currently has a forward price-to-earnings ratio of 11.9, which is considerably lower than developed markets like the MSCI USA Large Cap Index at 22.1 and the MSCI EAFE Index at 14.0. This significant discount makes emerging markets an attractive option for those seeking value.
Additionally, investor sentiment is playing a key role in this opportunity. Historically, low investor enthusiasm has often acted as a contrarian signal. Emerging markets are currently “hated,” as evidenced by the lack of equity flows into these regions. While U.S. markets saw $329.3 billion in equity inflows and international developed markets attracted $38.6 billion through August, emerging markets saw a mere $4.3 billion. This combination of low enthusiasm and undervaluation could be the sign investors look for before markets turn around.
Recent performance also hints at a positive shift. Over the past two quarters, emerging markets have outperformed both the S&P 500 and the MSCI EAFE Index. This steady rise amidst global market uncertainty suggests that these markets might be at the start of a prolonged uptrend.
Several macroeconomic factors are driving this renewed optimism. China and India, two countries that make up nearly half of the major emerging market indices, are leading the way. China’s government is rolling out various stimulus measures, including rate cuts and reductions in bank reserve requirements, to boost economic growth. Meanwhile, India’s strong demographic profile, with a young and growing population, coupled with political stability under Prime Minister Modi, offers a solid foundation for long-term growth.
These developments align with broader global trends. Interest rate cuts in major economies have led to a weakening U.S. dollar, a scenario that typically benefits emerging markets. Furthermore, the ongoing shift in global supply chains—where companies are bringing production closer to home or to politically aligned regions—could further boost the prospects of these markets.
For investors considering emerging markets, Sevens Report highlights several investment options. Exchange-traded funds (ETFs) such as the Vanguard FTSE Emerging Markets ETF (NYSE:VWO) offer diversified, low-cost exposure to these markets. Additionally, the WisdomTree Emerging Markets High Dividend Fund (NYSE:DEM) targets income-generating assets within these regions.
While emerging markets have historically been risky, current conditions suggest that this could be an opportune moment for those willing to take on some risk, particularly given the favourable valuations and broader global shifts supporting these markets.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
