The real value is in emerging markets

The recent market sell-off is throwing up attractive opportunities in global emerging markets.

With the MSCI Emerging Markets index down 2.81% over the past three months, several individual constituent countries have now moved below their long-term average valuation ranges and into cheap territory.

Chinese expansion

Looking at Asia, even the slowdown in the Chinese Purchasing Managers Index (PMI) for the third successive month has failed to dampen growing investor confidence in the region, with the markets able to take this in their stride after the figures came in better than expected.

This week it was revealed that China’s PMI fell to 51.2 from 52.1 in July and has now hit its lowest level in 17 months. However, economists have been sanguine, noting that the country’s economy remains in expansionary territory and the Chinese authorities are maintaining that GDP growth for the year could still come in at 9.5%, which would be significantly above last year’s figure of 9.1%.

Added to this, it has been well-documented that China has been looking to cool its economy to prevent over-heating and the slowdown can, at least in part, be explained by the government shutting a number of inefficient factories in order to help meet its energy saving targets, which in turn indicates that, at face value, the numbers should not be taken as being as weak as they seem.

Booming earnings

In the broader Asian region, 280 of the constituents of the MSCI Asia Pacific Index reported in July, with average year-on-year corporate earnings growth coming in at a staggering 133%. Although this is in comparison with what was a very weak second quarter in 2009 and is obviously unlikely to be sustainable at this rate, a drill down into the numbers is even more encouraging.

Overall, 42% of companies beat analysts’ earnings expectations, compared with 23% that missed their estimates. However, in the consumer goods sector, some 87% of companies exceeded expectations, which is indicative of strong domestic demand, while 49% of industrials, led by shipping, also topped the consensus view, suggesting global trade levels remain better than expected.

This positive corporate newsflow coupled with the recent market sell-off is leading many investors to increase their allocations to emerging markets.

Although the MSCI Asia Pacific Index rose by 5.6% in July, it is still down 5.36% over three months and by 1.11% year to date. In the broader global emerging markets spectrum, Eastern Europe has been even harder hit, down 7.62% over three months, despite a 12.7% rise in July and remains 2.37% lower than at the start of the year. Latin America has been more robust, off just 1.58% over three months, while the Bric Index returned -3.24% over the same period.

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