Emerging Markets: The Unloved Investment Opportunity of the Year

As I sit here writing this article, I am reminded of the wise words of Warren Buffett: ‘Price is what you pay. Value is what you get.’ In the world of emerging markets, it seems that investors have forgotten this fundamental principle. Despite improving earnings estimates and a weakening US dollar, emerging market stocks are trading at a steep discount to their US counterparts.

Emerging markets are offering investors a unique opportunity to buy low and sell high.

The numbers are stark. For every dollar of future profits, investors are now paying 45% less to own emerging market stocks compared to US stocks. This is the widest discount since the Covid-19 pandemic in March 2020. The MSCI Emerging Markets Index trades at a price-to-earnings ratio of 11.9 times, based on 12-month blended estimates compiled by Bloomberg. In contrast, the S&P 500 trades at 21.5 times.

So, what’s behind this caution? According to Nenad Dinic, an equity strategist at Bank Julius Baer in Zurich, ‘The current low valuations of EM compared to the S&P 500, despite improving earnings estimates, reflect investor hesitance.’ This hesitance is linked to ongoing debates about US economic growth and the potential impact of a Republican victory in the upcoming elections, which could introduce strong tariffs and weigh heavily on emerging market sentiment.

The upcoming US elections are causing uncertainty among investors.

But is this caution justified? I would argue that it is not. Emerging markets are very cheap, underloved, and underowned. As Ygal Sebban, investment director at GAM UK Ltd, put it, ‘The US takes it all still.’ However, this does not mean that emerging markets do not have their own unique opportunities.

Emerging markets are offering investors a chance to tap into growth opportunities.

One area that is driving growth in emerging markets is technology. The consensus profit estimate for the technology sector is nearing a record high, driven by excitement over artificial intelligence. However, there are also concerns that the expected financial performance from the sector may not materialize quickly. Investors are waiting for results at the end of August from the most-watched AI stock, Nvidia Corp., to gauge whether the sector’s gains can be sustained.

Nvidia Corp. is a key player in the emerging market technology sector.

Another area that is driving growth in emerging markets is the weakening US dollar. The MSCI EM Currency Index is on track for a second month of gains after setting a record high on Tuesday. This is boosting local-currency estimates when converted into US dollars.

A weakening US dollar is boosting emerging market currencies.

So, what does this mean for investors? In my opinion, emerging markets are offering a unique opportunity to buy low and sell high. With improving earnings estimates and a weakening US dollar, the fundamentals are in place for a rally. However, investors need to be patient and look beyond the short-term uncertainty.

Investing in emerging markets requires patience and a long-term perspective.

In conclusion, emerging markets are the unloved investment opportunity of the year. With their low valuations, improving earnings estimates, and weakening US dollar, they offer investors a chance to tap into growth opportunities. However, investors need to be patient and look beyond the short-term uncertainty. As Warren Buffett would say, ‘Price is what you pay. Value is what you get.’ Emerging markets are offering investors a unique opportunity to buy low and sell high.