Isn’t overweight emerging markets the consensus view? :: HSBC

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Our overweight on emerging markets met little
resistance. We argue that, in an environment where
developed economies are likely to suffer another
year or two of sub-trend growth, emerging markets
offer better growth, greater probability of earnings
forecasts being revised up (since analysts forecast
almost identical EPS growth, 13-18% for all regions,
next year) and less risk (with volatility of EM
indexes this year lower on average than the volatility
on the S&P500).
But many investors worry that this is now the
consensus view: who doesn’t like EM?
While that may be true, we don’t believe that the
greater attractiveness is priced in. Even after the

recent sharp run-up in stock prices, the valuation of
the EM universe does not look pricey, either relative
to history or relative to the developed markets.
Forward PE for MSCI Emerging Markets, for
example, is currently 11.4x. That is still well below
the long-run average of 13.7x, and below the MSCI
All Country World Index PE of 12.1x (itself
particularly low compared to the history going back
to 1988). Asia ex Japan, on 12.8x, is also below the
long-run average of 14.4x.


We suspect that attractions of emerging markets
mean they will run up significantly further over
the coming quarters, and that strategists will
eventually be forced to think up spurious reasons
to justify the big premium over developed
markets. But, for the moment, there is no need –
they are cheaper. (There are a few exceptions.
For example, we continue to find India on 17x,
one standard deviation above its long-run average,
very expensive.)
And, structurally, investors remain very
underweight emerging market equities. Surveys
find, for example, that US pension funds have
only 6% of their assets in emerging market
equities. British retail investors have less than 1%
of their financial assets in emerging markets –
their financial advisors usually steer them towards
UK equities, on the grounds that these are less
risky. Japanese life companies generally are
barred from buying emerging market securities.
Many large US funds still use the MSCI World or
EAFE Indexes, which don’t include emerging
markets at all.
And, even the MSCI All Country World (ACW)
Index, which does include emerging markets,
significantly under-represents their weight in the
global economy. Emerging markets are only 13%
of the index (Chart 4), but they make up 29% of
the world economy (and 37% in PPP terms).