On a relative basis, emerging market valuation measures look cheap. MSCI data shows emerging markets...
On a relative basis, emerging market valuation measures look cheap. MSCI data shows emerging markets on a price to book value of 1.8x, which compares very favourably with 2.7x for the world and 3.4x for the US.
Domestic demand appears to be returning to many emerging market economies and is evident in others such as Korea.
This pain of change now sees them economically positioned as an attractive capital inflow proposition, receptive to business cycles, as Mexico now experiences for the first time, and corporately cleaner and leaner.
We can now see how the combination of focused companies operating on keenly priced labour and the global outsourcing theme generate new wealth to be spent by willing consumers playing catch-up with their developed world neighbours. If the forecasting community is correct, then a lukewarm global recovery of one or more phases is already under way. A modest global recovery is the ideal scenario for the emerging markets.
As the stretched consumers in the developed markets demand ever more value for money, emerging market economies such as China leverage their low-cost labour competitive advantage to meet the conditional demand in a way that developed economies struggle to match.
When you add the ingredient of abundant commodities and natural resources in many developing markets, the mix becomes a clear growth recipe. Combine this with an abundance of cheap money due to low global interest rates and a US Fed likely to raise rates slowly, if at all, then it is surely safe to expect emerging markets to continue on their recent performance path.
Certain caveats must be understood if we are to believe that emerging markets can advance into a further period of outperformance.
The obvious first point is that any global recovery, be it fast or slow, could quickly be killed off. The primary possibilities are first that, for autonomous reasons such as over-stretched balance sheets or excess capacity, a corporate capex upturn may fail to materialise and deal a blow to sectors such as technology and dependent economies such as Taiwan.
Second, consumer demand, particularly in the US, may falter, dealing a blow to those emerging economies feeding the US consumer such as Mexico.
We cannot ignore the reality of physically committing investment to emerging markets and the difficulty some investors may have in selecting suitable companies and acquiring equity holdings.
The emerging market asset class is small on a global scale and many key players such as Mexico are shrinking constantly through acquisition, merger and lack of IPO replacement.
Despite the past two quarters of performance from emerging markets, it is premature to say that decisive de-coupling from Wall Street has been achieved. We are all aware that Wall Street continues to be the centre of focus for world financial markets and it is undeniable that emerging markets have historically struggled to hold their own when global equity sentiment turns negative. The true test will come if the US market stumbles at any time in this present phase.
Domestic demand returning to many areas.
Labour is a competitive advantage.
Low global interest rates.
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