Brief analysis by Monika Rosen, Chief Analyst at Bank Austria Private Banking:
Single-digit PER for emerging markets equities – too much of a bad thing?

  • Emerging markets exchanges under strong pressure, PER below 10
  • Are the price slide and pessimism exaggerated?
  • Bank Austria Private Banking still overweighting emerging markets

While the volatility on the international financial markets has risen in general recently, the emerging markets have been hit particularly hard, and both the equity and bond segments have been impacted. However, the market strategists at Citigroup now believe that the price slide being experienced by emerging markets equities is exaggerated.

The price-earnings ratio for the emerging equity markets based on the earnings expected for this year has now fallen below 10, which is the lowest valuation level since November of last year. The latest sell-off was triggered by the comments made by Fed chief Bernanke in May, in which he asserted that the US economy is showing signs of recovery and that the Fed is therefore starting to consider reducing its monthly bond purchases. The Fed is currently buying USD 85 billion worth of bonds each month, and a gradual exit from the programme is seen as the first step towards a tighter monetary policy (even if the first interest rate hike is still a long way off). Bernanke's statements sent yields in particular skyrocketing around the globe and thus took a lot of the wind out of the sails of the emerging markets exchanges.

In the past, PER levels of around 10 on the emerging equity markets have generally led to positive performance in the subsequent 12 months. In addition, the developed exchanges have not exhibited a PER below 10 since the year 2000 – not even during the financial crisis of 2008!

Naturally, it must be acknowledged that the growth rates in the emerging markets are slowing down, but the question remains whether greater losses are being priced into the market than may actually materialise. In addition, the local central banks still have room to cut interest rates, in contrast to those of the industrialised countries. This also applies to fiscal policy, where the emerging markets still have more leeway than the Western countries. Last, but not least, the sentiment towards the emerging markets is already very negative, so it would only take a slight improvement in the data to trigger a reversal.

Summary: Despite the most recent turbulence, we are sticking to our overweighting of equities because we still believe that they offer an advantage over bonds. We also remain optimistic with regard to emerging markets equities because we believe that the fundamental data are better than the current performance suggests.

Enquiries: Monika Rosen
Chief Analyst at Bank Austria Private Banking
Tel. +43 (0) 50505 - 40104
E-mail: monika.rosen@unicreditgroup.at