Outlook2013: A year in global emerging markets
“In all likelihood we willget a continuation of the muddling throughand more of the samefor equity markets. Inother words, anaemicdeveloped worldeconomic growth (butmuch stronger emergingactivity), plenty of liquidity,record low interest ratesand generally positiveequity markets.”
First, taken in isolation, GEMs look extremely attractive in terms of valuations, bothabsolute and relative to history as well as on a market capitalisation to GDP basis.For example, the forward price-earnings ratio (PE) for GEM currently stands at around10 times, compared to an historic forward multiple of above 12 times.
MSCI EM 12-month forward PE
Source: Schroders, FactSet, IBES, MSCI, data shown to September 18, 2012.
Moreover, in terms of market capitalisation to GDP, emerging markets are trading at morethan one standard deviation below the historic average (see below). This measure hasusually been a very good indicator of long term over- or undervaluation.
GEM aggregate Index to GDP
Source: UBS, data shown to August 31, 2012. Past performance is not a guide to future performance.
Second, two of the three most significant headwinds for risk assets in 2012 should beginto fade as we progress through next year. Specifically, Chinese economic growth appearsto be responding to the modest easing measures that were implemented earlier thisyear. Third quarter GDP growth was up 7.4% year on year and there were signs that theeconomy was gaining momentum in the second half of the quarter. In particular, exports,consumer spending and leading indicators all suggest that the third quarter may havemarked the bottom in terms of economic activity.
681012141618202219941997199920022004200720102012MSCI EM 12m Forward P/E Average
050100150200250300Dec 88 May 92 Oct 95 Feb 99 Jul 02 Nov 05 Apr 09 Aug 12GEM Aggregate Index/GDP AVG +1STD -1STD-57%-54%+121%+396%+342%-65%+154%% moves in the MSCI EM Price Index