We believe there are 10 factors supporting the rebalancing of investment portfolios to emerging market (EM) equities. Chief among them are: 1) the attractive valuations of EM stocks relative to other regions; 2) accelerating economic growth across EM nations; and 3) positive economic indicators in China.
1) Regional valuations: We find EM valuations—specifically in terms of price-to-sales (P/S) ratios—to be attractive relative to global and developed market valuations.
2) Economic growth: The cyclical economic backdrop is constructive, as the growth rates of many of the largest emerging market economies have stabilized and are now heading high. As a group, EM growth bottomed in late 2015/early 2016 and has been exceeding expectations ever since. Our heat map below shows the ongoing economic recovery across the developing world, led by countries such as China, India, and Russia. Abundant shades of green are positive, signifying EM economies in various stages of expansion.
3) China: We think China is uniquely positioned to benefit from positive cyclical and structural forces, namely:1) a final consumption-to-gross domestic product (GDP) ratio that’s above 50% and rising; 2) booming imports and domestic demand growth; 3) a service sector (52%) that has eclipsed manufacturing (40%) as a share of GDP; and 4) a budding recovery in business investment and capital expenditures.
For the full list of factors, please see our paper entitled, “10 Things You Should Know About Emerging Market Stocks.”
Additionally, watch Talley Léger’s interview with CNBC on emerging markets.
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Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile.