In this Q&A, William Palmer and Michael Levy, Co-Heads for Emerging and Frontier Equities, discuss their approach to accessing the asset class, current trends, and why recent headwinds may be becoming tailwinds.
EM equities have started 2019 positively after a challenging end to last year. How is the asset class now positioned for investors?
Michael: The correction in equity markets last year reflected investor concerns regarding the U.S. Federal Reserve’s tightening, and the potential implications for EM countries, especially those with current account deficits. In addition, rising trade tensions between the U.S. and China also contributed, raising questions on global growth. In our opinion, these two factors led investors to demand a higher risk premium for investing in EM equities.
William: We note the risks associated with these events have fallen in the last few months. Firstly, the Federal Reserve has become much more dovish in response to more mixed economic data in the U.S. Secondly, there has been significant progress in the trade discussions between the U.S. and China. The reversal of these former headwinds into potential tailwinds have been a significant driver of markets so far this year.
Michael: As economic activity slowly improves, corporate earnings should also follow. This is likely to provide further support for equity prices as confirmation of this earnings improvement materializes.
William: It’s also worth noting investor expectations remain depressed as reflected in the modest consensus forecast earnings growth for 2019 and attractive relative valuation versus MSCI world equities on both a P/E and P/B basis. This low bar gives considerable potential to positively surprise over the course of this year, while current valuations provide an attractive entry point for investors to build a strategic position in emerging market equities.
Emerging Markets Equities are Forecast to Continue Reporting Positive EPS Growth1
1. SOURCES: Barings, Factset, MSCI. As of April 30, 2019.