Although developed market equities have outstripped their emerging market equivalents during the first half of the year, Vontobel Asset Management’s Thomas Schaffner, senior portfolio manager, and Roger Merz, head of mtx portfolio management, see plenty of green shoots in the latter’s case.
“To borrow a football analogy…it is only halftime and there is still a lot to play for in the second half of the year,” they wrote.
Developed market equities have soared this year, largely as a result of the AI boom, which has lifted the stocks of a number of the picks and shovels providers, most notably Nvidia.
However, Schaffner and Merz make the case for emerging market equities for three reasons.
Firstly, emerging market earnings growth is likely to outstrip that from developed markets due to the high number of market-leading companies in specialist areas like semiconductors and battery technology.
“2024 earnings growth in that region is estimated to be more than twice that of US corporates and almost five times that of Japanese corporates, with IT companies tipped to lead the charge,” they said.
Secondly, real GDP growth at more than 4% both this year and next year is set to be higher than in developed markets, where growth is just 1% both years.
Finally, valuations for emerging market equities look compelling, where equities are trading on a Shiller price-to-earnings basis at a 50% discount to those in developed markets.
“Although Shiller P/E does not tell us much about the short term, we believe it is a powerful signal that long-term investors should not ignore given that it has demonstrated strong explanatory power for longer-term asset returns,” they said.
