Low valuations put EM equities in spotlight

Asset Class in Focus

There are reasons to bet on emerging market equities despite poor performance last year.

The MSCI Emerging Markets Index fell into negative territory in 2018, with a full year return of -14%.

In 2019, Nick Timberlake, global head of emerging markets for HSBC Global Investment Funds, believes it is time to buy in.

“Emerging market valuations are attractive relative to profitability,” said Timberlake.

As measured by price-to-book, emerging market equities are in a sweet spot, trading at less than their 10-year average, but posting a 13% return-on-equity that is similar to levels in much higher value developed markets.

For Timberlake, this valuation disparity is the most compelling of the four factors – growth, liquidity, valuations and “active management” – that underpin his positive outlook for the asset class this year.

“There is a big gap between re-rated stocks in the US and the low valuations typical in emerging markets,” he told FSA.

“Valuations are also appealing on a historical basis and a lot lower than the heady levels reached just before the global financial crisis.”

Moreover, if emerging markets have robust GDP growth, it will likely support double-digit corporate earnings growth, he believes.

“The unusually subdued sell-side analysts’ forecasts of around 13%, suggest that there is room for upward earnings revisions later in the year.” In addition, negative sentiment at the end of last year suggests that global investors are underweight the asset class, so “the marginal investor should be a buyer”, he said.

US dollar risk

Timberlake also thinks that global liquidity will remain supportive, despite the gradual exit from quantitative easing. There is a risk, however, that an uptick in inflation might induce the US Federal Reserve to hike interest rates, and a consequent stronger US dollar would dampen emerging market equities performance.

Other risks to his outlook include a continuation of US protectionist trade policies, faster than expected exit from quantitative easing, unexpected swings in commodity prices, and further slowing of China’s economic growth.

Timberlake’s top country picks are Russia and China.

“Russia has a very conservatively-run economy, domestic consumption is rising and well-managed companies are generating plenty of cash, providing dividend yields of about 8%,” he said.

China has been out of favour because of the slowing economy. However, Timberlake is encouraged by the re-balancing that is taking place as it de-leverages and moves towards a consumer-based economy.

“There are large number of companies that offer good value,” he says.


The HSBC GIF Global Emerging Markets Equity fund, managed by Timberlake, has earned a 53.52% three-year cumulative return, slightly lower than the benchmark MSCI Emerging Markets index (55.55%), according to FE Analytics.

HSBC GIF Global Emerging Markets Equity vs benchmark

Source: FE Analytics. In US dollars.

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