17.06.2015

Looking for growth : an opportunity for stock picking

 

 

 

Emerging markets GDP has been decelerating since 2010. Growth of 3.5% could be expected for 2015, which would represent the fifth consecutive year of economic slowdown.

 

 

 

 

 

 

Emerging markets under pressure


Today, emerging markets are under-rated and under-owned. The current EPS ratio, of 12 times the expected profits over the next 12 months, is below the historic average (see chart 1). It also represents a discount of 30% compared to international equities.

 

Chart 1: MSCI EM 12 Months Forward PE Ratio relative to MSCI World Index

 

Sources: Thomson Reuters, MSCI, Natixis Asset Management Asia Limited, end of May 2015


Growth of investment into most emerging markets has slowed down, with almost USD 50 billion currently remaining neutral or underweight.
Furthermore, in the current context of disappointing performances and declining average inflation observed over the past few years, emerging central banks have entered a cycle of monetary policy easing. Twenty or so rate cuts have been applied since the beginning of the year across most emerging markets.


What are the consequences for investors going forward?


Investors can expect a return of 5-10% from emerging markets, which is in line with earnings growth. We believe that the depreciation in exchange rates and wage moderation (given the inflation rate) will enable emerging companies to improve their operating margins, after seven years of deterioration. Gains in productivity could reverse the trend over the next twelve months.
Finally, the average correlation between emerging stocks has never been so low (see chart 2).


Chart 2: Average correlation against MSCI EM Index

 

Sources: Bloomberg, MSCI, Natixis Asset Management Asia Limited, end of May 2015

 

The benefits of stock picking have never been so high. With a relatively neutral beta and a low degree of correlation, emerging equities are a real stock picking market opportunity once again.


Read Emerging Markets Views - June 2015

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