Investing.com — Emerging markets have long held the allure of rapid growth potential and diversification benefits, but investors have often been burned by the volatility and structural risks associated with them.
However, with shifts in economic fundamentals and global financial dynamics, a fresh evaluation is warranted. So, are emerging markets finally a buy?
As per analysts at Sevens Report, emerging markets may indeed be approaching an opportune moment for investors to re-enter.
Several factors suggest that these markets are not only cheap but also poised for a potential rally. One of the key reasons is the current valuation.
The MSCI Emerging Markets Index has a forward price-to-earnings ratio of 11.9, much lower than that of developed markets, such as the MSCI USA Large Cap Index at 22.1 and the MSCI EAFE Index at 14.0.
This considerable discount makes emerging markets attractive from a value perspective.
Investor sentiment, often a contrarian indicator, further enhances the case. Sevens Report analysts point out that emerging markets are widely “hated,” evidenced by the dismal equity flows into these regions.
While U.S. equity inflows through August totaled $329.3 billion and international developed markets saw $38.6 billion in inflows, emerging markets managed just $4.3 billion.
This extreme lack of enthusiasm, combined with undervaluation, may be the contrarian signal investors look for before the tide turns.
Another positive sign is the recent performance trend. Emerging markets have outperformed both the S&P 500 and the MSCI EAFE Index in the last two quarters.
This steady performance amidst global market uncertainties indicates that the sector might be in the early stages of a sustained uptrend.
Looking deeper, there are several macroeconomic catalysts driving this optimism. China and India, which account for nearly 50% of major emerging markets indices, are at the forefront of these developments.
In China, policymakers are unleashing an array of stimulus measures aimed at reviving economic growth. These include rate cuts, reductions in bank reserve requirements, and more fiscal stimulus to come.
Meanwhile, India’s demographics provide a massive runway for growth. With a burgeoning population, particularly in the younger age brackets, and political stability under the Modi administration, the country is positioned for long-term structural growth.
These factors align with broader global shifts. Interest rate cuts in major economies are reducing the value of the U.S. dollar, which historically benefits emerging markets.
Moreover, the trend toward supply chain realignment—where companies “nearshore” or “friendshore” their production closer to home or to politically aligned regions—could further benefit emerging markets.
For those considering entering the space, the Sevens Report outlines several investment vehicles, including ETFs that offer diversified exposure to these markets.
The Vanguard FTSE Emerging Markets ETF (NYSE:VWO), for instance, provides broad-based, low-cost exposure, while the WisdomTree Emerging Markets High Dividend Fund (NYSE:DEM) focuses on income-generating assets within emerging markets.