Emerging Markets Benefit from Low Commodity Prices
Asset Managers Betting on Global Equities (Part 8 of 9)
Improving valuations
Emerging market equities are currently trading at 11.2x on a one-year forward earning basis. Emerging markets (EEM) have historically been valued at a discount when compared with US equities (SPY) and European equities (EFA). But these discounts have diminished with time as a result of the broader scope of growth in emerging markets. The valuations for the week ended April 10, 2014, improved by 1.96%, mainly on Chinese equities that showed strength based on new inflation data.
China is showing signs of a revival. The services industry PMI (purchasing managers’ index) rose to 52.3 in March 2015. The country is planning to revamp its foreign exchange rules. It wants a stable exchange rate as it pushes for reforms.
Impact of commodity prices
Commodity prices and oil (USO) prices have recovered marginally over the past two weeks. South Korea (KOSPI) and Brazil (IBOV), along with China, have also improved as a result of inflation and commodity prices.
Oil prices are still showing signs of weakness due to inventory buildup and consistently higher output. In contrast, oil-importing and low-inflation economies such as South Korea (EWY), China (FXI), and India (EPI) are benefiting from falling oil and low commodity prices.
Asset managers will have to redeploy their capital on the short- to medium-term horizon in order to take advantage of the shifts across emerging market economies. Managers that will likely benefit from the performance of emerging market equities include BlackRock (BLK), Fidelity Investments, Franklin Resources (BEN), Goldman Sachs (GS), HSBC Asset Management (HSBC), and Blackstone (BX).
Browse this series on Market Realist: