JPMorgan: Why now is a good time to buy out-of-favour emerging markets
The firm said volatility has weighed on emerging market equity performance, resulting in valuations on a “price-to-book” ratio falling to below 1.5x – their lowest levels in over five years.
When valuations drop to this level, the MSCI Emerging Markets Index has historically registered double-digit returns over the following 12 months, according to JPMorgan data.
This has led the fund house to suggest investors can expect “reasonable returns” going forward, especially relative to developed market equities.
Richard Titherington, chief investment officer, emerging markets equities at J.P. Morgan Asset Management said: “There are always unforeseen risks in emerging markets and it is an asset class driven more by sentiment and confidence than others. After the strong performance of developed market equities in 2013, emerging market equities currently trade at the largest discount to developed market equities in nearly 10 years.
“At the moment, buying emerging markets is neither obvious or popular – but buy before it is obvious, because the obvious thing is almost always wrong. History suggests fortune favours the bold.”
Emerging market equities have been hit hard this year over concerns about economic stability and the outlook for growth in many economies, with sell-offs prolonged by geopolitical events.
JPMorgan said the volatility is likely to continue given that countries holding uncertain elections amount to 28 per cent of total emerging market growth.
However, despite significant short-term headwinds for the asset class, the firm said the long-term structural dynamics for many emerging market economies remain intact.
For example, urbanisation ratios in India and China are dramatically below US and Japan, which should lead to higher levels of income and consumption, supporting market returns.