We believe the 10 factors currently supporting the rotation of investment portfolios to emerging market equities include:
- regime switching, as investors rotate from advanced to developing markets;
- attractive valuations in the form of relatively low price-to-sales ratios;
- accelerating growth across the emerging economies;
- robust demand from China;
- rising raw industrial commodity prices;
- higher expected earnings growth for emerging market companies;
- net inflows into emerging market equity funds;
- emerging market stock price momentum that’s gathering force; and
- superior total returns on emerging market stocks over the long term.
Although the real growth rate of China’s gross domestic product (GDP) is widely forecasted to slow in the second half of the year, we find that China’s output and activity indicators are soaring in double-digit territory, and believe they point to potential upside surprises relative to consensus expectations.
Additionally, we believe Moody’s recent downgrade of China’s credit rating—the first in 30 years—is likely reflected in those stocks already. Current valuations seem very depressed relative to the global benchmark, to other developing market equities, and to history.
Overall, we believe emerging market stock valuations still offer compelling long-term opportunities for investors.
Equities are subject to market risk and volatility, they may gain or lose value. Investments in securities of growth companies may be especially volatile. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks. Emerging and developing markets may be especially volatile.
This material is for informational purposes only and is not intended to be investment advice, a recommendation, or to predict or depict the performance of any investment.