Opportunities within the emerging markets marketplace are being undervalued due to misconceptions of the market drivers, according to London-based emerging markets specialists Ashmore
Valuations on emerging markets equities should be much higher as they are no longer a commodities and cyclical play, but are largely driven by structural growth, leading to some excellent opportunities for value, Ashmore said in a statement released today.
Jan Dehn, head of research at Ashmore, points that the MSCI EM equity index is now made up of more than 50% structural growth drivers, and that the tech share of MSCI EM now supersedes that of the S&P 500. Through this, the implications on emerging markets valuations are highlighted, and how they ought to trade at a premium compared to historical levels as a result.
“Perceptions about emerging markets (EM) usually lag behind reality, sometimes by decades,” said Dehn. “Nowhere is this more evident than in the perception about EM equities, where the consensus opinion remains that EM equities – and the MSCI EM in particular – is primarily a commodities and cyclical play.
“This view is outdated and wrong. Today, the structural growth drivers constitute more than 50% of the MSCI EM equity index, while the cyclical share is down to 20%. The commodity component has fallen to just 14%, which is less than half of its share a decade ago. Moreover, the tech share of the MSCI EM now constitutes 23%, which is greater than the tech share of the S&P 500.
“The implication is clear. As a structural growth play, EM equities ought to trade higher than their historical valuation and should be closing the gap in valuations versus equities in developed economies The fact that this has not yet happened suggests value in the asset class,” he said
Having traditionally been heavily skewed towards commodities, the MSCI EM equity index now looks very different, says Dehn, partly due to the rise of technology.
Transition of commerce
“The ability to skip entire stages of development by adopting the most up-to-date technology allows EM countries to accelerate their convergence with wealthier countries,” he said. “Also, software and internet services have outgrown EM growth for many years and these trends will likely persist. The transition of commerce from physical to electronic methods is advancing at a brisk pace as consumer preferences shift towards online shopping, driven by familiarity, convenience and falling transaction costs.
“And given lower starting points for tech penetration and per capita incomes in EM the potential for growth is that much higher and sustainable,” said Dehn.