EMs expected to outgrow advanced economies

Oksana Patron

24 August 2023

The emerging markets (EMs) are expected to continue to see stronger earnings growth thanks to superior GDP growth expectations and the fact that they are trading at discounted valuations, according to Martin Currie.

Its portfolio manager, Alastair Reynolds, also pointed to the fact the EM’s performance versus developed markets (DM) over the long term was driven by relative earnings growth.

“What we’ve observed historically is that during strong outperformance periods for EM equities, the earnings growth is double-digit (strong on both an absolute and relative basis),” he said.

“Fortunately, we are right at a key turning point and the case for EM earnings outpacing DM is strong, in our view. It’s driven by higher growth rates (GDP) and less margin pressure as inflationary forces abate.”

Reynolds stressed that there was a divergence between earnings and share prices in China and strong earnings delivery came from two key areas in the Chinese stock market: Chinese digital economy stocks and Chinese financials (namely insurance companies).

“There is a positive divergence between fundamental earnings delivery (relative to MSCI EM) and the stock performance (relative to MSCI EM) using the two largest Chinese benchmark holdings in the MSCI EM (Tencent and Alibaba),” he noted.

“When we see such a divergence between share prices and stock earnings, we view this as an opportunity for fundamental, bottom-up investors. We have increasing confidence in the profitability of these quality growth companies in EM.”

According to the International Monetary Fund (IMF) forecasts, the EM will outgrow the advanced economies, forecasting 4.0% GDP growth for EM and 1.2% for DM, while global growth was estimated at just under 3.0% for 2023. Within that, China and India are expected to be key drivers of this, contributing to approximately 50% of that growth projection.

Asked about the valuation, Reynolds said that EM currently offered “a once in a generation opportunity in terms of a reasonable absolute and relative valuation”.

“The asset class is trading at a 35% discount to MSCI World. Using a medium-term outlook, MSCI EM Index is trading at 10x P/E versus the MSCI World Index at 15x,” he noted.

“The beef may have been in DM over the past decade, but that does not mean it will continue and the current backdrop in EM looks exciting. With superior GDP growth expectations, trading at discounted valuations, and the expectations for stronger earnings growth going forward, it’s clear to us the beef is now in EM,”