Emerging markets: Risks abound but so do opportunities

FOR a while in 2016, it seemed that emerging markets (EMs) may yet shake off the malaise that has afflicted them over the past three to four years. Valuations were relatively attractive and the cycle of earnings downgrades appeared finally to have bottomed.

The region contended with headwinds in the form of worries over China's slowdown, the surging US dollar and, later in the year, Donald Trump's triumph in the US presidential election which raised fears of protectionism. Still, the MSCI Emerging Markets index gained 11.1 per cent last year after three straight years of losses. Equity fund flows as tracked by EPFR Global showed a modest uptick of US$1.7 billion at end-2016.

Based on the MSCI Emerging Markets index, the region's equities are trading at a forward price/earnings (P/E) multiple of 11.9 times and a price-to-book (P/B) multiple of 1.4 times. This is just a tad higher than the average valuations since 2004. In contrast, the US market is trading at a forward P/E multiple of 17.5 times and a P/B multiple of 2.7 times.