Latest Emerging Market Viewpoints
From Matt Linsey and the North of South Capital team
As we near the end of 2017 and look forward into the new year, many investors will be asking whether there is still value to be found in our markets. After all, we have seen 30%+ gains in dollar terms in many of the Emerging Market indices, significantly ahead of moves in the developed world. In fact, we seem to be on track to see the MSCI EM index outperform the S&P for the first year since 2012.
As we focus on valuations, we do find there are areas of the market that require aggressive long term growth assumptions. However, we have no difficulty finding stocks that we want to own – largely because valuations were low to start with and because we have been seeing improving fundamentals to match the share price growth.
Using a simplistic measure, the tech-heavy Taiwanese TWSE index is trading around 13x 12mth forward earnings. This is similar to last year’s valuation and lower than during 2012-2014. This is in the context of Taiwanese 10yr bond yields stuck at 1%, even lower than the 1.6% seen during 2012-14 period. Unsurprisingly, the market remains one of our top overweights.
The broader MSCI Emerging Markets index trades at 12.3x forward earnings. This is at the high end of the past five year range of 9.0x - 12.5x but this is in the context of:
- Lower cost of capital in many markets - Brazilian SELIC central bank rate at 7% is the lowest it has been since its inception in 1999 and reflects
a decline from 14.25% in 2016
- A different mix – high growth technology/ internet stocks account for 28% of the index against 12% in 2010
- A benign global environment, driven partly by China’s thus far successful rebalancing act towards more sustainable domestic consumption.
Putting this in context, the S&P500 index now trades on 18.3x forward earnings, following a steady increase from 12.8x in 2012. During this period 10yr bond yields have risen from 1.8% to 2.4% in the US – while by no means dramatic, it cannot be argued that lower cost of capital has contributed to a re-valuation of the market.
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