Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

EMERGING markets (EM) look appealing - they are cheaper than developed markets on a number of measures and their economies are predicted to grow faster.

Analysis by our colleagues in the Fidelity asset management business suggests companies in EM countries are at an unusually cheap level. On one measure - the comparison of share prices against the estimated value of company assets, known as price-to-book - EM companies haven’t been this cheap compared to developed markets since 2002.

When comparing share prices to company earnings, another valuation measure known as the p/e ratio, the discount is 26% compared to developed markets. 

A more sophisticated measure known as CAPE, or the cyclically adjusted price-to-earnings ratio, is at 11, some 19% below the 15-year average1, according to Schroders. Some investors believe this measure is more reliable as it smooths out the effects of economic cycles.

2024 estimates MSCI Emerging Markets MSCI World
Price-to-book valuation 1.5 2.8
P/E 13.3 17.9
Dividend yield (%) 3.0 2.1

Source: Bloomberg, as at 30 June 2023.

In short, there is a blizzard of numbers that suggest EM is cheap - but is there a catalyst for revaluation?

The benefit of having younger populations to drive stronger economic growth is often trailed as a reason for optimism, with the trend particularly strong in India and South-East Asia. EM economies are forecast to grow faster than Europe and the US, with Asia paving the way.

The continent is estimated to generate 70% of global growth this year.

EM economies may also be more resilient compared to previous cycles. They typically have less dollar-denominated debt, which has caused problems in recent years amid dollar surges, and they have more significant foreign exchange reserves. Interestingly, central banks in emerging markets were ahead of the curve in raising interest rates. It’s a stark difference to the UK where sticky inflation remains an issue.


Source: IMF, World Economic Outlook, April 2023.

Country by country

For most investors, exposure to EM can be achieved through a general EM fund (more on this below). Some funds and ETFs offer a focus on single countries, a far riskier choice than a broader fund.

Starting with the largest country, there is optimism with China’s economy reopening, although it’s recovery may not be linear.

Tom Stevenson encapsulated the mood perfectly in his latest market news. “China has struggled to emerge from its Covid lockdowns with anything like the vigour it needs to deliver the 5% annual growth that Beijing has targeted,” he said.

Still, it’s not all gloom. Chinese households accumulated $1.5trn of excess savings during the country’s zero Covid policy. Whether this will spur growth remains to be seen.

High commodity prices are also helping countries with relatively large mining industries, such as South Africa, Mexico and Brazil. There’s a positive outlook for commodity prices over the long-term. Keep your eye on decarbonisation efforts, which is set to drive prices higher - clean energy technologies are commodity intensive.

Risks like populism and inflation are often priced into EM. Still, investors are treading carefully. The market is cautious of geopolitical risk which among emerging markets still exists.

Geopolitics is also having an impact through what has been “near-shoring” - companies choosing to relocate operations to countries closer to and perceived to be lower risk, also called “friend-shoring”.

Apple moving its manufacturing to India and Tesla moving its factories to Mexico are just two well-known examples. Vietnam and Indonesia are also expected to benefit.

Company comparisons

The consequence of depressed valuations is showing up in some high-quality companies.

One startling example is a comparison between US chipmaker and AI leader Nvidia’s and Taiwan chipmaker TSMC. Nvidia’s share price has soared, driven by AI hype, by around 100% over the past year, pushing it to a p/e multiple of over 200 times by the end of June. By contrast, TSMC has been broadly flat over the same period, and has a p/e multiple of 15 times.

Nvidia outsources the manufacturing of its chips to companies like TSMC and could not exist without it, making the difference in performance even more surprising.

This is largely due to the market’s perception of geopolitical risk, rather than any fundamental issues with TSMC’s business.

What next?

The additional risks of investing in EM, which have been historically volatile, should be carefully considered in the context of your portfolio. If you’re curious to find out more, Fidelity’s Select 50 list of favourite funds caters for investors seeking EM income or growth via four actively managed funds, two ETFs and an investment trust.

Region Select 50 fund
Asia and emerging markets  Comgest Growth Emerging Markets
Asia and emerging markets  Fidelity Funds - Asian Smaller Companies Fund
Asia and emerging markets  HSBC MSCI AC FAR EAST ex JAPAN UCITS ETF
Asia and emerging markets  iShares Core MSCI EM IMI UCITS ETF USD
Asia and emerging markets  Lazard Emerging Markets Fund
Asia and emerging markets  Schroder Oriental Income Fund Limited
Asia and emerging markets  Stewart Investors Asia Pacific Leaders Sustainability Fund

Find out Tom Stevenson’s view on the prospects for Asia and emerging markets in his latest Investment Outlook video below.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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