JP Morgan Asset Management has crunched the figures and reckons that investors in emerging markets - currently out of favour - could perform strongly in the year ahead.
Emerging markets are out of favour. The latest ugly scenes in eastern Ukraine will have done nothing to cool anxieties. Since the start of this year, for instance, the MSCI BRIC Index has fallen 0.6 per cent (as of last Friday); the MSCI EM Index, covering a broader range of markets, was up by a mere 1.0 per cent. The MSCI EM Eastern Europe Index, unsurprisingly in light of recent events, is down by more than 11 per cent. (It is worth noting, though, that the MSCI World Index of developed economies' equities is also down by 0.8 per cent.)
After such markets were hurt last year by the growing feeling that the days of ultra-loose global interest rates were drawing to an end, some investment houses started 2014 with a hope of better things to come, at least eventually. As the middle of spring is almost upon us, however, investors are still waiting for a catalyst.
So how should investors think about emerging markets? JP Morgan Asset Management has crunched some old numbers and, with the usual warnings about past performance, argues that the evidence points to high double-digit returns over the next 12 months.
To back up such a relatively bold claim, the US firm makes a number of points.
It says political uncertainty and currency volatility have been flashpoints for emerging markets this year and volatility has been high. But the firm argues that long-term structural dynamics for many emerging market economies “remain intact”.
“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,” it said.
“Also, volatility has weighed on emerging market equity performance, resulting in cheaper valuations. When price-to-book (P/B) values have fallen below 1.5x, the MSCI Emerging Markets Index has historically registered double-digit returns over the following 12 months,” JP Morgan AM said.
“Given emerging markets are approaching their lowest levels in over five years, history suggests that investors can expect reasonable returns going forward, especially relative to developed market equities,” it continued.
“Investors focused on long-term fundamentals will find this presents an attractive entry point,” Richard Titherington, chief investment officer, emerging markets equities, JP Morgan Asset Management, said in a note. “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 EM is neither obvious nor popular – but buy before it is obvious, because the obvious thing is almost always wrong. History suggests fortune favours the bold,” he said.
The firm throws in some other data:
-- Emerging markets’ share of global nominal GDP is forecast to reach nearly 40 per cent by 2018, up more than 10 per cent in just over a decade. Yet emerging markets still account for only 11 per cent of global market capitalisation in the MSCI All Country World Index;
-- Emerging markets are becoming a reliable source of income: EM dividends per share growth has outpaced developed markets dividend growth and outpaced EM earnings per share growth over the long-term;
-- The ratio of passengers per automotive per 1,000 people is 797 in the US. That compares to 58 in China and just 18 in India, which illustrates the scope of potential growth in the emerging market car industry alone.
All in all, then, JP Morgan Asset Management appears to suggest that darkness comes just before the dawn. It takes quite a lot of courage to heed such advice and buy when everyone else appears to be getting nervous. But if what is said about behavioural biases and mistakes in investment is true, then such advice might be sound.