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EMs among world’s ‘most mispriced’ asset classes: Lazard

Patrick Buncsi18 January 2024
Emerging markets growth undervalued

Emerging market (EM) equities are among the most undervalued asset classes globally, thus presenting one of the “most attractive” investment options in 2024, according to a new report by global asset management firm Lazard.

Lazard’s Emerging Markets Outlook 2024 predicts the EM market will be upheld by favourable macroeconomic trends, including significant policy easing enacted in 2023 and early 2024, with potential for “significant alpha generation” from the latter half of this year.

Valuation discounts for EMs, relative to developed markets and US equities are hovering near 30% and 40%, respectively, according to Lazard, both of which are wider than their long-term averages.

While beginning their recovery last year after bottoming out in late 2022, EM “valuations remain generally inexpensive” relative to DMs, the firm said.

“Much capital has left emerging markets in recent years, and many parts of the asset class remain markedly under-owned despite being attractively valued, with high and improving economic growth and financial productivity, such as return on equity, free cash flow yield, and dividend yield,” Lazard wrote.

This “sharp rise” in the EMs discount relative to DMs is driven in large part by China’s low valuations, Lazard said. Outside of China, EM discounts are in line with the 10-year average.

Following sharp declines in 2021 and 2022, earnings growth expectations for EMs have moved higher relative to DMs, Lazard noted.

Much of this growth will be driven by emerging Asia as well as information technology companies across all emerging markets.

The firm notes that China’s internet platform companies, made up predominantly of media, entertainment and retailing sectors, are also among the bigger contributors to earnings growth.

Meanwhile, India is expected to benefit from a “demographic dividend” with nearly 80% of its population younger than 50, while Indonesia will benefit as it “[climbs] up the metals value chain”.

Beyond Asia, growth prospects in Latin America, namely Brazil and Mexico, have greatly improved off the back of nearshoring trends and an increase in foreign direct investment as companies adjust their global supply chain strategies.

“Not since the 2000s during the commodity super cycle has the economic growth premium been moving in emerging markets’ favour,” Lazard wrote.

Expect ‘equity-like returns’ for EM debt

Coming off its largest quarterly gain since 2020, with 2023 seeing double-digit growth across both sovereign credit and local debt, Lazard remains buoyant on the prospects for bonds in the developing markets this year.

“As we enter 2024, we maintain a constructive outlook on EMD [emerging markets debt] amid a backdrop of ongoing monetary cycle easing,” Lazard wrote, with central bank rate hikes and cuts “continuing as per the pattern” of recent years.

“Fixed income markets historically tend to generate equity-like returns during the period between the end of central bank rate hikes and the completion of rate cuts.”

“We expect this trend to continue as major global central banks have concluded their rate hike cycles, with inflation remaining better than expected and labour markets loosening.”

With a dispersion in monetary and fiscal policies and a considerable number of elections occurring worldwide, Lazard notes that there are “ample opportunities for alpha generation”.

In sovereign credit, countries, Lazard currently favours Colombia, Oman, Indonesia, Azerbaijan, Paraguay, and Serbia, while avoiding AA and A countries, where “credit spreads remain near multi-decade tights”.

In local debt, the firm recognised opportunities in “high yielders where real yields remain substantially above potential growth rates”, including in Brazil, Colombia, Mexico, South Africa, and Hungary, with idiosyncratic opportunities in numerous countries undergoing elections this year.

Lazard also cautioned investors on two potential tail risks, including a ‘hard landing’ scenario for the global economy, with potential for “significant spread widening and EM foreign exchange depreciation, as well as a reacceleration in inflation, which would prompt DM central banks “to restart rate hikes and EM central banks to end rate cuts early”.


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