Which is what makes the case for emerging markets such a difficult one to make. There is no doubt they are cheap, but there are also a lot of rather good reasons for them to be so.
But, there does come a point when the payoff involved makes even big risks worth taking. And, it would seem for some asset allocators valuations within emerging markets are beginning to reach such levels.
James Butterfill, ETF Securities head of investment strategy and research, is one of those with a bullish view on emerging markets, pointing out earlier this week that emerging markets are a significant outlier in valuation terms.
Using the graph below, he demonstrated that at a current yield of 13.1%, emerging markets are trading significantly above the high end of its historical range.
Neuberger Berman is also bullish on emerging markets, writing in a note that, while risks remain, recent underperformance may have troughed, particularly in light of “compelling valuations in a benign global economic climate”.
Admitting that its expectations are optimistic, it said it viewed the recent downward earnings revisions as being primarily related to commodity and cyclical factors.
“While emerging markets companies were not used to slowing revenue growth, they have finally adjusted to the reality.
“With capital expenditures stabilizing, a focus on margins and cash flow may start to materialize. Current valuations are factoring in a bearish scenario, giving us scope for cautious optimism,” the firm added.
