Page 14 - ISQ UK_October 2021

INVESTMENT STRATEGY QUARTERLY

ATTRACTIVE VALUATIONS markets. With the size of the global middle class expected to
The recent weakness in emerging market equities has widened the rise considerably over the next decade, and the bulk of the gains
valuation gap with developed markets even further from already coming from the Asia Pacific region, we believe the slowdown
discounted levels. The underperformance of the asset class has will be short-lived. Once the pandemic-related challenges start to
caused the MSCI Emerging Markets Index to trade at a 30-35% dis- level off, the rising middle class should support increasing con-
count relative to the MSCI World Index and a 40% discount to the sumption and underpin growth trends for years to come.
S&P 500 Index. This is significantly below historical averages. While
much of the discount is attributable to the valuation premium TECHNOLOGY LEADERS
associated with US stocks, emerging market equities are nearing Over the last decade, emerging markets have transformed from
their cheapest levels in over 20 years. These attractive valuation cyclically-oriented, commodity-based markets to high-powered
levels will surely appeal to valuation conscious investors. technology leaders. While cyclical factors continue to play a role,
the Technology sector has emerged as one of the most important
EXPANDING MIDDLE CLASS drivers within emerging market growth. While China was at the
The rapid ascent of the middle class has been one of the key forefront of this revolution, a growing list of tech-related compa-
drivers behind the explosive growth in emerging markets over nies within the emerging market universe are trying to capitalise
the last two decades. While the pandemic may have stalled con- on the growing markets for e-commerce, mobile banking, artifi-
sumption growth across the globe, we do not believe that the cial intelligence, health care, electric-vehicle batteries and more.
slowdown will turn into a permanent impairment in emerging We expect these trends to continue as more companies look to
meet the needs of their tech-savvy consumers.

Emerging Markets are Attractively Priced

25 -25%
21.4
19.5
20
-30%
NTM Price-Earnings Ratio 15 13.1 -33% -35% Emerging Markets Valuation Discount

10

5 -40%
-39%

0 -45%
MSCI Emerging Markets MSCI World S&P

Price-Earnings Valuation Discount
Source: FactSet, as of 9/7/2021

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