There is something seemingly surprising about performance related tostocks of developed countries compared to that of the emerging countries. In fact, despite the fact that the latter enjoy overall better economic/financial conditions (better economic prospects a enviable tax position e good shock resistance external economies), the market does not seem to reward them.
The expansive monetary policies of the Central Banks may have played a fundamental role in spreading this phenomenon. In fact, with the decrease in systemic risk, investors have increased their propensity for risk (which coincides with the search for higher returns) favoring, in fact, those markets that they know better (this tendency is called "home-bias") and with interesting evaluations. Then the developed countries.
After a couple of years of disappointing performance, many investors are now starting to wonder whether they should return to investing in emerging market equities.
Which markets offer the greatest opportunities?
Favoring a value-type strategy, we looked for those markets where prices are cheaper than the fundamentals (earnings, book value, dividend yield). In the graph below, we propose the summary of the analysis in z-score* carried out on a large part of the emerging countries included in the MSCI Emerging Markets index.
To the left of the graph (Czech Rep., Hungary) are those countries with themore interesting evaluations, while further to the right (Philippines, Mexico) are those countries with the higher ratings.
Overall, Emerging Countries are on average cheap, above all thanks to the contribution of China, Brazil and Russia, which account for around 50% of the index. If we break down the Emerging Countries into geographical areas, however, the index relating to European countries and the Middle East stands out, followed by the index relating to the countries of Asia Pacific and South America.
What should you pay attention to?
Though in the long run one type strategy value turns out to be a winner(several academic papers support this thesis), however one cannot completely ignore the short-term risks. Let's see what they can be.
- Risk-off periods. Normally, when there is great aversion to risk, Emerging Countries are penalized more. Right now, the European political tensions (Italy, Spain and Portugal) and the fear linked to a brutal landing of the Chinese economy could generate a "sell-off" phase, i.e. strong sales in a few days.
- Reducing the expansion of liquidity. Even if the end ofquantitative easing will not be as premature as anticipated by the markets, it is clear that we are facing a path of reduction in monetary expansion (at least as far as the Fed is concerned). This slight hint has reduced equity market valuations and has increased the yields of bonds of emerging countries making them more attractive.
- Dollar appreciation. Some commentators speak of a new Dollar Bull Market (economy recovering, end of QE, increase in interest rates). This could force the central banks of emerging countries to reduce the depreciation of their local currency by selling dollars. By doing so they would reduce their foreign reserve, making them more vulnerable to possible liquidity crises. A strengthening of the US dollar could also be a problem for those countries with trade balance deficits.
In conclusion, i Emerging countries have good valuations but the complexity of the situation in which we find ourselves makes the choice more difficult than one might imagine.
