While many global investors continue to show an unwillingness to allocate to emerging market equities, there are good reasons to be optimistic about the asset class, according to Lazard Asset Management’s (Lazard AM) third-quarter outlook.
Lazard AM lists multiple factors, notably attractive valuations, monetary policy easing, diversification, an improvement in earnings growth and GDP growth.
Regarding valuations, Lazard AM describes emerging market equity as “one of the most mispriced asset classes globally”, noting that on a forward price-to-earnings multiple, it is trading at 12.6x compared to 18.7x for developed markets
It noted that this more than a 30% valuation discount compared with a 24% historical average discount may narrow due to stronger earnings growth among emerging market equities.
The asset manager noted earnings expectations were now higher for emerging markets than they were for developed markets with consensus earnings growth in the former nearly 17% for this year compared with 11% in the US.
Lazard AM also noted that global investors remain under-allocated to emerging markets with 5.3% currently allocated, while a reversion to a 20-year average allocation of 8.4% would represent inflows of $910bn.
Attractive EM bond spreads
Regarding fixed income, Lazard AM said it was constructive due to a combination of emerging market pull factors and developed market push factors, namely monetary policy and economic growth, fiscal policy and valuations.
Regarding monetary policy and economic growth, it noted that emerging market countries were generally ahead of their developed market peers in cutting rates and when developed markets catch up, this would make emerging market policy rates more attractive.
It also noted that fiscal policy among emerging markets was better, whereas it described US fiscal policy as “reckless”.
Finally, it noted that emerging market credit spreads had compressed but not to the same extent as developed market credits.
“Recently, DM (developed market) credit spreads have been trading near their post-global financial crisis lows, showing unusual strength at this late stage of the economic cycle. In light of this, we believe EM (emerging market) sovereign and corporate credit spreads look more attractive than those for similar quality peers in DM,” it said.
