Developing economies have played second fiddle to developed market over the past few years, with U.S. equities leading the charge. However, investors are finally beginning to take a closer look at emerging market stocks and exchange traded funds as many search for cheap opportunities.
“Here at Deutsche Asset Management, we believe that the time is ripe for investors to rekindle their relationship with emerging markets,” Robert Bush, ETF Strategist at Deutsche Asset Management, said in a note. “At our most recent Chief Investment Office (CIO) day, we moved to an overweight on the region and, fortunately, we allowed our heads to rule our hearts.”
Specifically, Bush pointed to a number of contributing factors that helped support their overweight positioning. For instance, the developing economies are showing macro stabilization where gross domestic produce and commodity prices that support their economies have stabilized. China, the second largest economy in the world, is also revealing signs of improving industrial production, steady infrastructure spending and a more stable yuan currency.
The global economy is also on the path of growth, which has helped support increased exports out of the developing countries. Bush and the Deutsche team see outbound trade rising faster than imports in a number of large exporting countries, such as South Korea, Taiwan, Thailand and Russia.
Earnings growth is also a major contributing factor as Deutsche anticipates earnings to grow at more than 10% over the course of the next year in the benchmark MSCI Emerging Markets Index.
Discounted valuations, especially in an environment where U.S. equities are trading near record levels, provide a relatively attractive opportunity for investors. Even after the strong start to this year, current price-to-earnings ratio of MSCI EM is around 15.1, compared to the 22.2 for MSCI USA Index.