Now is the Time to Be Truly Active in Emerging Markets


Charles Wilson, PhD

Over the last three weeks, emerging markets have experienced one of the sharpest rebounds in the last 30 years – Where are we now?

After a dismal third quarter, emerging market equities have been rebounding sharply. In the ten trading days up to October 12, the MSCI EM Index increased 11.45%, delivering one of the most abrupt turns outside of a major post-crisis recovery.* The most recent rebound follows a 26% decline since the last market peak in April.** Where does that leave us now? Relative to long-term average multiples, I would say not too hot and not too cold.

  • On a blended 12-month forward basis, the index is now just above its long-term average of 11.3x earnings per share.
  • On a price-to-book basis, it is about 10% below the long-term average and about in-line with market lows outside the Asia crisis.

But that isn’t the whole story. In relative terms, it’s much more attractive than it has been in quite awhile. Following a period of prolonged underperformance, the MSCI EM Index is currently trading at a 38% discount (as of 9/30/2015) to developed markets, which is near the largest discount we have seen since the Asia crisis, although slightly better than the 40% discount we saw in mid August (see chart).

In all big pullbacks, we always see the good thrown out with the bad as everyone rushes for the exits at the same time. Despite the recent bounce, we are still finding plenty of great opportunities to buy high-quality companies with long-term growth potential at excellent prices. This is a great time to be a highly active manager in emerging markets.


Attractive Valuation: Relative Price to Book

Source: Bloomberg


*Since inception, the MSCI EM index has increased more than 11.45% in ten trading days 36 times. The bulk of those were during a period of crisis. It occurred 26 times in and around the Global Financial Crisis, 4 times following the Collapse of the Soviet Union, and 4 times following the Asia Crisis. It has happened only two times without a global crisis: the recent move and a move in 2011 following the Arab Spring unrest.

**Return given as total return.

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