Newspaper article The Journal (Newcastle, England)

Emerging Economies Still Have the Most to Benefit

Newspaper article The Journal (Newcastle, England)

Emerging Economies Still Have the Most to Benefit

Article excerpt


THE strategic argument for exposure to emerging economies remains very much in place.

Emerging economies still have the most to benefit from likely continuing trends in globalisation, with their comparatively greater export orientation and growing share of world trade. Alongside this, rapid population growth (while both a burden and a benefit), still suggests a faster level of absolute GDP growth for emerging economies than their developed peers.

However, equity markets are all about how reality measures up to expectations and, for some time, the bar has been set higher for emerging economies and equity markets buoyed by a decade or more of dynamic acronyms and increasingly subjective commentary.

Some of this froth has faded over the last year or so, with the marked underperformance of emerging equities versus their developed peer group's. So is it time to bite the bullet and add a tactical overweight to our strategic call? Valuations The valuation argument is perhaps not as clean cut as it looks. Certainly at the regional level, valuations look undemanding relative to trend and may indicate a greater valuation tailwind than might be enjoyed by developed markets right now. However, if you start looking below the hood and examine the sectors that are dragging those valuation multiples lower, much of this discount to recent history is harder to dispute. Sectors such as Chinese banks (over a third of the Hang Seng and 5% of overall MSCI emerging market capitalisation), where you can have little faith in the current earnings projections, materials and even energy all have good reason to be lowly rated at the moment.

Much of the energy sector in emerging markets remains under the umbrella of the state and suffers accordingly; while the materials sector's high dependence on Chinese capital spending suggests some caution is merited. …

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