Emerging markets are always a hot topic of debate when it comes to investing. With the glass half full, one is investing in large economies that are growing strongly, consumer incomes are on the rise, technological advances are improving productivity and the region is producing more and more innovative companies. With the glass half-empty, however, unstable economies, volatile currencies, corruption and political risks mean the emerging markets are a no-go zone.
As a result of political and economic instability, as well as volatile currencies, total returns from emerging markets over the past decade have been lacklustre at best. Over the last ten years, the MSCI Emerging Markets Index has delivered a total return of 2.2% compound per annum in dollar terms. And, all of the returns reflect a dividend yield of 3.0% while earnings growth has actually been negative in dollar terms over the period and valuations are little changed.
As always is the case in investing, it comes down to the price you pay for an asset and, in our view, valuations in emerging markets are today more than compensating investors for the additional risks that come with investing in emerging markets. As the chart highlights, the MSCI Emerging Markets Index is trading on a price-to-earnings ratio of 10.7x, compared to a long-term average of 12.0x since 2006.
While not the lowest on record, valuations are below the long-term average since 2006 and look much more attractive in emerging markets compared to other regional markets. The current valuation is a notable 40% discount to the key US equity market and an 18% discount to European equities.
Emerging markets have delivered very little to investors in dollar terms over the last ten years. However, with the key Chinese economy reopening and the pandemic in the rear-view mirror for many emerging economies, strong long-term tailwinds continuing to drive economic growth and attractive relative valuations, is this the time for Emerging Markets equities’ day in the sun?