Are emerging market equities cheap?
For investors, the real story is not so much in the aggregate valuations but in the very considerable valuation differences across regions, countries and sectors.
WITH the 20 per cent gain in the MSCI Emerging Markets Index since its low on Jan 21, 2016, investors may worry that the opportunity to invest in emerging market equities at the point where valuations are the most attractive has been lost.
Forward price-earnings ratios have indeed jumped significantly, with the Index now trading at 12.0x next-twelve-month earnings estimates based on IBES consensus data, compared to 10.4x in January. But even at the January level, it is not clear that emerging market equities are necessarily "cheap", given that the previous low multiple was 6.3x in October 2008.
Relative to the MSCI World Index, emerging market equities would appear attractive. Emerging market equities have almost always traded at a discount to developed market equities thanks to the higher volatility and uncertainty around corporate earnings, but that discount is greater today than it has been historically. Currently the relative forward multiple is 0.7 compared to a long-run average of 0.8 (see chart).
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