Features Emerging markets
CHART 1 : EM ETF INFLOWS DOMINATE Q1
Global Emerging Markets
Equity Global Large-Cap Blend Equity Global Large-Cap Blend Equity
China Equity Switzerland Equity
China Equity - A Shares US Large-Cap Growth Equity
Sector Equity Technology Global Equity Income
Asia-Pacific ex-Japan Equity
Source : Morningstar
€ 0bn € 1bn € 2bn € 3bn € 4bn € 5bn € 6bn € 7bn
CHART 2 : EMERGING MARKET VALUE
Emerging Markets Developed Markets
Source : Bloomberg
0 2 4 6 8 10 12 14 16 18 P / E
Rebecca Chesworth , senior equity strategist at State Street Global Advisors ( SSGA ), said : “ South-east Asia should lead the growth . EMEA and LATAM components , on the other hand , offer a commodity cushion , a necessity given higher demand stemming from China ’ s reopening and recent OPEC oil supply curbs .”
While emerging market equities seem to be the flavour of the day , the same cannot be said for fixed income . Following a strong start to the year , on the back of a torrid 2022 , emerging market debt suffered in the face of the banking crisis in March as investors took a risk-off approach to high yield debt .
Local currency global emerging market bond ETFs gathered inflows of € 700m in Q1 , much of it in the first two months of the year , offset by the broader global emerging market bond category which recorded € 610m outflows , according to Morningstar . Will Bartleet , CIO of
Pacific Asset Management , which looks at factors for all regions , said the firm is currently bullish on emerging markets overall but that the value factor looks particularly cheap .
“ Emerging market value is currently incredibly cheap . Compared to growth , it is 97 % cheaper than where it was in 2000 ,” he said . “ It is outperforming and keeping up with developed markets despite its failure to recover as quickly .”
The valuation of the MSCI Emerging Market index remains unstretched with a 12-month forward price-to-earnings ratio of 11.9x versus 16.2x for developed markets , according to Bloomberg .
While the asset class looks broadly undervalued compared to developed markets now , there are more fundamental reasons why an investor might look to incorporate the value factor .
Kumar Gautam , APAC quantitative equity strategist at Bloomberg Intelligence , said : “ Our factor model continues to overweight value , with the valuation still in the bottom quantile . It is less sensitive to US dollar gains and market volatility .
“ The spillover effect of China ' s reopening has aided south-east Asia in moving up in the rankings . India and Latin America are at the bottom of our country model .”
Despite the uptick in sentiment , emerging markets remain a risky bet and could suffer in the face of a global recession . Even more existential is the increasingly tense geopolitical situation around Taiwan with any sign of an invasion likely to have an impact far broader than emerging markets .
“ Emerging markets are always high risk , but we believe we are more than compensated for this with high growth at attractive valuations ,” Prout added . “ The key to investing in emerging markets is to avoid the countries that are likely to spiral into currency devaluation .”
Theo Andrew is senior reporter at ETF Stream
MAY 2023 | ETF INSIDER 19