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Is the EM recovery running out of steam

A significant recovery in sentiment and valuations of emerging markets assets has been under way over recent months but is this to last?


If we go by the MSCI emerging markets index, often used as the benchmark for emerging market equities funds, a bounce-back began in March this year and a relatively rapid improvement ensued up until the end of July.


In late July there was a small fall back down however it is too early to tell if this is a change in the direction of travel or just a blip.

Cofunds remain bullish on emerging markets, saying this week there has been a ‘seismic shift’ in attitudes towards the sector, with Q2 net sales up 159.6% from the previous quarter. It also found that 43% of advisers it questioned describe their outlook for the emerging markets sector as ‘optimistic’.

Behind the improvement in sales is a stronger belief in China and in commodities, Cofunds said. The number does of course mean that 57% of advisers were something other than optimistic, it should be noted. 

Meanwhile, European investors continue to pour money into the asset class. The month of June recorded the highest net inflows into emerging markets equity funds since January 2013, with €2.1bn. Across Europe, emerging markets equity sentiment is correspondingly buoyant with more than half of Europe’s fund selectors planning to increase their allocation to the asset class (see graph below).

Pan-European EM equity sentiment


Are emerging markets still undervalued?

Indications coming from other equity market research suggest there is plenty of value out there in emerging markets at this early stage in the recovery, particularly relative to most developed markets.

Morningstar’s latest quantitative price versus fair value ratio analysis indeed found that most developed market countries are overvalued. The US and most European countries plus Japan had positive ratios of between 1 and 10, indicating equities are overvalued in those countries in aggregate terms. Only the UK bucked this trend with a ratio of -0.5 indicating British equities are still marginally undervalued.

In contrast, most emerging market nations were found to have negative ratios by the same measures with Brazil at -5.5, Russia at -6.4, and China at -1.1. Of the BRIC countries only India was found to be overvalued by Morningstar’s methodology, perhaps showing that the election of Modi and the positive sentiment coming from it has been overplayed.  

South Africa, Chile and Mexico also had positive ratios which further demonstrates that the picture is far more nuanced than simply being able to say emerging markets as a whole are still undervalued.