3 Reasons Not To Ignore Global Emerging Markets

Full article here: FSM

KEY POINTS

• With the growing importance of the region, EM economies will make up nearly half the global economy over the next five years, making the region too large to ignore by investors
• EM equities also continue to have little representation in global investor portfolios and equity benchmarks
• The growth disparity between EM and developed economies is even more stark in the current environment, which should see EMs find favour amongst global investors
• Stronger economic growth should translate to superior rates of earnings growth, driving stock market returns
• While the growth prospects of EMs are invariably stronger, investors are currently not paying a premium for these positives; EMs actually trade at a discount to their developed market peers at present
• We forecast strong potential upside for EM equities, and reiterate our 5.0 star “very attractive” rating on the market

Even as the IMF and World Bank recently downgraded their forecasts for global growth in 2012 and 2013, emerging markets (EMs) remain a bright spot, with long-term structural themes of increasing urbanisation, favourable demographics and a growing middle-class expected to propel their economies forward. In this update, we look at three reasons not to ignore EM equities which are currently our favourite regional equity market with a 5.0 star “very attractive” rating.

REASON 1: TOO LARGE TO IGNORE

Even as many investors still view EM equities as a peripheral “satellite” investment, the representation of EM countries in the global economy has grown by leaps and bounds. Based on the latest forecasts of the IMF, EM economies will increase their representation in the global economy to 43% by 2017, up from 38% presently (in 2012), and significantly more than the 23.5% in 1980 (see Chart 1), a function of their quicker pace of economic expansion. Simply put,over the course of the next five years, EM economies will make up nearly half the global economy, which will make the region too large to ignore by investors.

CHART 1: INCREASING REPRESENTATION IN THE GLOBAL ECONOMY

Investment Implications:

Despite their rising importance to the global economy, EM equities remain under-represented as a percentage of global equity market capitalisation, as well as within investor portfolios. As mentioned earlier, EM economies (based on the IMF classification) will make up 38% of the global economy (in nominal USD terms) in 2012. In contrast, their respective stock markets had a market capitalisation of USD10.6 trillion (as of 12 October 2012), making up just 21.1% of global stock market capitalisation.