Emerging Markets: Trends, Value, and Risks | ETF Insider | Page 19

Features Emerging markets
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
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