Emerging market equities – navigating a bumpy but attractive route

In 1990, developed markets accounted for just over 60% of global GDP and emerging markets for just under 40%.

Today, the ratio is reversed.1 At the same time, the weighting of emerging markets in the MSCI All Country World Index has only risen from less than 5% to just over 10%2, showing room for expansion. For asset owners, a meaningful allocation to emerging market equities is justified by the likelihood that market capitalisation will continue to rise. Not only does long-term GDP growth support an investment in EM equities, but current valuation levels suggest that the past outperformance of developed markets is unlikely to be repeated over the next decade. While many emerging markets remain cheap relative to past and forward earnings, developed markets look overvalued. The chart below shows the current P/E ratios of different markets. With a P/E ratio of 11, emerging markets look much more attractive than, for example, the US equity market at almost 17.

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