Lex is a premium daily commentary service from the Financial Times. It helps readers make better investment decisions by highlighting key emerging risks and opportunities.
Athletes and actors adopt all manner of methods to calm their nerves before a big event. Emerging market investors may want to take a leaf out of their book to deal with recent market jitters. Ever since the U.S. Federal Reserve hinted that it would start to taper its quantitative easing program, capital flight from emerging markets has sent stocks tumbling. The MSCI Emerging Market index is down almost a sixth since May. Are investors getting carried away?
Not all emerging market equities have taken a tumble. Just look at Argentina, Vietnam, Nigeria and Macedonia as examples. The Buenos Aires main index is up by almost a quarter in dollar terms since the start of the year. And in spite of the hysteria over Brazil's real, the Bovespa stock market index has been rallying since July, as has Russia's benchmark index. Both are up by 8 per cent over the past two months alone. Granted, equity markets in Turkey and Indonesia have fallen by a quarter since their peaks this year, but they are at levels seen many times over the past five years. India's Nifty index has only slipped to its 200-day moving average, where it has been seven times in the past four years.
In any case, as far as price is concerned, emerging market equity valuations are no longer exorbitant. Russia's Micex index trades on five times expected earnings. It has hovered at this level for the past two years, but remains 25 per cent below its long-term average. The multiple for Brazil's Bovespa index is 15 times – above its five-year average of 12 times, but it has been to 18 times twice over that period. And with India's Nifty index trading on 13 times expected earnings it may not be a screaming buy – it fell to 8 times in 2008 – but it is still only half as expensive as it was back in March, 2010.
Sure, all bets are off if interest rates in the developed world start rising quickly. The flood of liquidity has been a big driver of emerging market equities since the collapse of Lehman Brothers. But these funds must go somewhere. Asia still has a current account surplus. And the U.S. and Europe remain fragile.