Kunal Ghosh, manager of the Allianz Emerging Markets Equity Fund is one of those of the view that the emerging markets rally that began this year when they began to outpace developed markets is sustainable, should the global economy successfully navigate the Trump transition.
Earnings growth
According to Ghosh, one of the primary drivers of the recent rally in EM assets was the Brexit vote in the UK which prompted investors to reconsider the risks facing developed markets and to look with fresh eyes at the emerging world.
At present, he said, on a 12 month forward view emerging markets are predicting earnings growth of 11.7 times, which compares to 9.5 times for (Europe, Australasia and the Far East (EAFE) and 10.8 times for the USA. Yet, despite this, emerging markets are trading on a 12 month forward P/E ratio of 12.2 times, while EAFE is currently on 14.5 times and the US is on 16.9 times.
This is similar to the view expressed by AXA Investment Managers which said, in its 2017 outlook, that there are three reasons why developed market investors should starting investing or increase their allocation to EM assets.
The first is the valuation argument expressed above, about which it added: “our current estimates of EM ERP – excess return over the risk-free rate implied by market prices – are not only higher than the US market, but also their historical average.
The other two reasons are risk diversification and better economic prospects within the region.
Of course, the firm does also outline the risks to that view, including the spectre of Trump and the need for these markets to truly decouple from developed markets if they are to retain their diversification benefits. But, in a low-growth, low-return world, the case for investing in those regions where growth is still possible currently trump the alternative.
