The sovereign debt crisis in the eurozone discourages investors, who are instead attracted to emerging markets, where low debt and strong current accounts make the asset class attractive.
The outlook is one in which strengthening global demand, led by the emerging market consumer and infrastructure investment, drives positive revisions to the asset class’s earnings estimates, which should in turn support emerging equity markets.
Market consolidation means that valuations look attractive for the asset class – the 12-month forward consensus price/earnings ratio for the MSCI Emerging Markets index is just 10.6 times, according to data from Factset, the Institutional Brokers’ Estimate System and MSCI – while generally low, global interest rates should make equities more attractive.
A reallocation of investments away from developed equity markets towards emerging markets is likely, and the ongoing sovereign risk stress in the eurozone may serve to intensify this trend.
Any full normalisation of developed market monetary policy will probably mark the end of this phase of the investment cycle. But the ongoing stresses in the eurozone seem likely to move that timing point further out, and strong absolute and relative performance from the emerging market asset class should be expected in the quarters ahead.