Investing.com – Emerging markets have long been drawn by the potential for rapid growth and diversification benefits, but investors have often been put off by the volatility and structural risks associated with them.
However, with shifts in global economic fundamentals and financial dynamics, a new assessment is warranted. So, are emerging markets finally becoming a buy option?
According to analysts at Sevens Report, emerging markets may already be approaching the right moment for investors to re-enter.
Many factors suggest that these markets are not only cheap, but also poised for a potential rally. One of the main reasons is the current valuation.
The forward price-to-earnings ratio is 11.9, well below those in developed markets, such as the MSCI USA Large Cap Index at 22.1 and the MSCI EAFE Index at 14.0.
This deep discount makes emerging markets attractive from a value perspective.
Investor sentiment, often a contradictory indicator, reinforces this situation. The Sevens Report analysts point out that emerging markets are widely “unloved”, as evidenced by weak equity flows into these regions.
While total US stock flows as of August amounted to $329.3 billion, and developed international markets saw flows worth $38.6 billion, emerging markets were able to achieve only $4.3 billion.
This extreme lack of enthusiasm, coupled with currency undervaluation, may be the contrarian signal investors are looking for before the tide turns.
Another positive sign is the recent performance trend. Emerging markets have outperformed both the MSCI EAFE index in the last two quarters.
This consistent performance amid global market uncertainty suggests that the sector may be in the early stages of a continued uptrend.
If we look deeper, we find that there are many macroeconomic catalysts driving this optimism. China and India, which account for nearly 50% of major emerging market indices, are at the forefront of these developments.
In China, policymakers are unleashing a raft of stimulus measures aimed at reviving economic growth. These include interest rate cuts, reductions in banks’ reserve requirements, and further fiscal stimulus in the future.
On the other hand, India’s demographics provide a tremendous path for growth. With a growing population, especially in younger age groups, and political stability under the Modi administration, the country is positioned for long-term structural growth.
These factors are consistent with broader global transformations. Interest rate cuts in major economies lead to a decline in the value of the US dollar, which historically benefits emerging markets.
Moreover, the trend towards supply chain realignment – where companies “close-shore” or “friendly” their production closer to home or from politically aligned regions – could further benefit emerging markets.
For those considering entering this field, the Sevens report outlines several investment vehicles, including ETFs, that provide diversified exposure to these markets.
For example, the Vanguard Emerging Markets ETF (NYSE:) provides broad, low-cost exposure, while the WisdomTree Emerging Markets High Dividend Fund (NYSE:) focuses on income-producing assets within emerging markets.