Corporate earnings, which have been revised upward for the first time in five years, as well as improving macroeconomics, are making a strong case for emerging markets, according to a statement from Eastspring.
Echoing Eastspring, Schroders, which is also positive on emerging market equities, believes that analyst expectations on earnings revisions have become more realistic and point to earnings growth in 2017.
“Emerging market corporates’ capital allocation and cost efficiency has been improving,” Tom Wilson, Schroders’ head of emerging market equities, said in a research note. “This should support profit margins and lift return-on-equity.”
Valuations in emerging market equities are also attractive, Wilson added. Currently, the MSCI Emerging Markets Index is trading around 11.7x on a 12-months forward price-to-earnings basis, which is in line with average. On a price-to-book basis, valuations are attractive, trading at around 1.4x, which is below the long run average.
Given the generally attractive value of emerging markets, an earnings recovery could trigger further investor interest in 2017, Eastspring said.
"The valuation of sovereign and investment grade bonds and defensive stocks reached an extreme high in 2016, while non-defensive or cyclical sectors are trading near historical low valuations"
Eastspring sees attractive opportunities in China, Korea and Russia, Kevin Gibson, the firm’s chief investment officer for equities, said in the statement.
The firm also sees opportunities in cyclical stocks, believing that it could be the next asset class to rally, given the shift among investors toward riskier assets in search higher returns.
“The valuation of sovereign and investment grade bonds and defensive stocks reached an extreme high in 2016, while non-defensive or cyclical sectors are trading near historical low valuations,” Nick Ferres, Eastspring’s head of multi-asset solutions, said in the statement.
Uncertain global politics will potentially increase market volatility, however. Schorders’ Wilson said that the tail risks revolving around world politics have increased, especially coming from the upcoming elections in Europe this year.
Potential changes to US trade policy also carry an unequal upside or downside risk, according to Wilson.
“Trump’s protectionist standpoint is a potential negative for global trade and therefore emerging markets,” he said, noting that the impact of any change in trade policy will vary by country and stock.