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Are Emerging Markets Looking Cheap?

Are Emerging Markets Looking Cheap? Morningstar

Investors have favored the perceived safety of developed market equities this year – leaving emerging market indices trailing behind. Bronze-rated M&G Global Emerging Markets fund manager Matthew Vaight said that following the recent market falls, the valuations of emerging market equities are now compelling.

“On a price-to-book ratio, emerging market equities are currently trading around their lowest level for many years, and are cheaper than developed market shares by some 25%,” he said.

The M&G calculations are based on the MSCI indices, comparing the MSCI Emerging Market Index to the MSCI World Index. The Emerging Market Index has fallen 7% this year, while the World Index is up 14%. These findings mirror the Morningstar Global Emerging Markets Equity category which was trading at 1.88 price to book at the beginning of the year and has fallen to 1.59 this week, indicating it is now undervalued.

Morningstar analyst Oliver Kettlewell said that the long term positives of investing in emerging markets still stand. The fundamentals in emerging markets are conducive to long term growth. There is a growing middle class, improvements in education, technological developments and emerging market economies are less dependent on exports to the developed world.

“Emerging market countries have their public finances in a better order than many developed nations,” Mr Kettlewell said. “Look at the current account surplus in China - we don't have that stability in the UK."

Morningstar analysts hold M&G manager Mr Vaight in high regard. After placing the fund under review in September after former co-manager Michael Godfrey left, analysts reinstated his Morningstar OBSR Analyst Bronze rating in April.

Many emerging market fund managers are now saying that it pays to be selective when considering holdings from the sector. Where in the past it was enough to offer exposure to the four BRIC nations - Brazil, Russia, India and China, now stock pickers have to look further afield. Several former emerging economy stars have failed to deliver this year. Last year the Turkish stock market returned 56%, but it has failed to deliver year to date, in part due to the political unrest. Similarly South Africa and Namibia rose 11.5% last year, and have lost 7% in 2013. The best performing emerging market indices so far this year have been Indonesia, Malaysia and Thailand.

This article was originally published on Morningstar under the title: Are Emerging Markets Looking Cheap?

Tags: BRIC , emerging market banks , emerging market nations , emerging markets , equities , markets
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