One of the world's largest investment houses gives an optimistic medium-term view on the case for emerging market investing.

There is continued upside potential for emerging markets to expand faster than developed economies such as those in Europe and North America, and equities in these younger economies are trading close to their averages, which means they are not expensive, argues Natixis, the international investment house.

Most emerging market countries have younger populations and a growing number of workers and this situation is not changing soon, the firm said in a note. Labour force productivity in EM countries can generate growth rates of 5 per cent or more, while in the US the figures are lower at 2 per cent and 1-2 per cent in Europe and only 0-1.0 per cent in Japan.

Emerging markets have been hit by rising US interest rates – EM countries that have borrowed in dollars have suffered rising repayment costs – and worries about a US/China protectionist fight. Last year, the MSCI Emerging Markets Equity Index fell by 14.6 per cent. 

The MSCI Emerging Markets Equity Index trades at 13.0 times trailing earnings and 12.6 times forward earnings, and yet the three-year forward earnings growth compound annual growth rate for this sector is 14 per cent, way above the US S&P 500 Index at 9 per cent, the firm said. At the end of 2018, Natixis held $917.1 billion of assets under management. 

“The EM bond space offers a glimpse into the secular re-rating (i.e. upgrade) of EM countries. 15 years ago, virtually every EM sovereign bond issuer was below investment grade. In other words, the EM debt space had high yield/`junk’ quality. Today, while ratings vary, the broad EM sovereign market is a BBB- rate space – low investment grade,” Natixis said. 

“Another secular change has emerged in EM over the last 15 years: while many EM countries remained somewhat tethered to raw material production, exports, and prices, in general, commodity sensitivity of EMs has been, at the margin, falling. Now many EMs are more integrated into the global manufacturing/production process and more integrated into global trade and supply chains, making them somewhat less vulnerable to commodity price boom/bust swings,” it said. 

The investment firm also pointed out that China, classified as an emerging market, is the second-largest economy in the world and, on a purchasing-power-parity basis, is now the world’s largest. Measured by gross domestic product, India is larger than France, Brazil is larger than Italy, Mexico and Indonesia.