There has been little question that the performance of the MSCI Emerging Markets Index (MSCI EM) has been lackluster thus far in 2013.
Other equity markets, such as those in the United States, have opened up a significant performance gap if one looks at the past three years.
It is for this reason that we believe EM Equities deserve closer attention, specifically on the valuation front.
Evaluating the Historical Context
EM Equities has a history extending back to December of 1987 and thus encompasses a variety of market environments. Our goal is to construct a framework allowing us to analyze the valuation levels of EM Equities over a period of approximately 25 years. While one can never know future performance with certainty, we do believe it useful to know whether current valuation levels look closer to being expensive, inexpensive or just about average.
Year-End Dividend Yield as a Potential Valuation Indicator
We believe that the MSCI EM’s dividend yield is an important indicator of its valuation. In fact, as of July 31, 2013, more than 95% of the MSCI EM’s weight was in companies that had paid at least one dividend over the preceding 12 months, indicating a strong dividend-paying culture in the region.
With respect to comparisons to its own historical levels, our research shows that the MSCI EM’s starting trailing 12-month dividend yield at the beginning of a calendar year had a strong relationship to the subsequent performance over the next 12-month period.
The MSCI EM has 24 full calendar years of index data for which year-end trailing 12-month dividend yields can be calculated. We divided these years into two baskets sorted by the trailing 12-month dividend yield as of December 31 of each year: