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Are Emerging Markets Cheap?

Last update on: Feb 02 2017

Emerging economy stock markets have been down for a couple of years, and they had another sharp leg down early in 2014 that led the global markets lower. The question for investors now is, are emerging market stocks cheap? Some investors apparently believe they are, because the equities rose over the last couple of weeks. Before plunging in, consider this review from Morningstar. It takes a look at historic value and price trends for the emerging equities. The article says that because of changes in the emerging markets and the indexes, it’s not a good idea to do a straight comparison of historic valuations with current valuations. Its conclusion is that after the recent price decline, emerging market equities are somewhere around fair value but not at deep discounts.

The “growth” story really took off about 10 years ago, thanks to a confluence of factors. First, the Chinese growth machine was operating at full speed. Annual gross domestic product growth rates were clocking in around 10%, thanks to economic reforms, strong export growth, and heavy investment in factories, infrastructure, and housing. Export growth was supported by low interest rates in the developed world, which drove a multiyear consumer spending boom. And thanks to China’s capital investment spree, commodity prices skyrocketed, benefiting resource-rich countries such as Brazil, Russia, South Africa, and Indonesia. Emerging-markets sovereigns were also growing more fiscally stable. After the crises of the 1990s, many developing nations began to address their fiscal and balance-sheet issues, which resulted in a more stable macroeconomic environment and less currency volatility. And overall growth was strong–annual GDP growth rates in many emerging markets were trending in the high single digits.

All of these positive trends translated into exceptional equity market returns. From 2001 to 2010, the MSCI Emerging Markets Index (in U.S. dollars) returned an average of 15.8% a year, compared with the MSCI USA Index’s 1.5%. Strong GDP growth and stellar equity market performance combined with improved access to the developing world’s capital markets resulted in strong investment flows. By the end of 2010, assets in U.S.-domiciled emerging-markets funds had risen almost 20 times, from 10 years prior, to $300 million. Emerging-markets stocks were having their heyday.

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