Emerging Markets Are at Very Attractive Valuations Relative to U.S.
The headlines out of emerging markets (EM) have been challenging over the past few years, but this negative sentiment has helped create the current opportunity. Relative to the U.S. market, EM valuations on both price-to-book ratio (PBK) and forward price-to-earnings ratio (PE) are in the top 10% most attractive periods of all time. On many valuation measures, EM is at its largest relative discount versus the U.S. since the late 1990s (see Exhibit 1). From those attractive starting valuations of the late 1990s, emerging markets went on to outperform the U.S. market in seven of the next eight calendar years, 2000 – 2007, by an average of 16% per year.
Exhibit 1: EM at Largest Relative Discount vs. the U.S. Since Late 1990s
Source: MSCI, SBH. Price/Book and Price/Earnings measures for MSCI EM and MSCI USA through 3/31/24. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. Indexes are unmanaged and are not subject to operating expenses or other fees. One cannot invest directly in an index.
Emerging Market Valuation Advantage Found in Value, Not Growth
This opportunity in EM stocks is not equally distributed – EM growth stocks are much more expensive than usual (in some cases almost as expensive as U.S. stocks); the current valuation opportunity is instead found in the value part of the EM space. Over the past few years, we have seen this valuation differential help propel value stocks over growth stocks in emerging markets, with value having now outperformed in 12 of the last 14 quarters (as of 3/31/24). Most of this outperformance has come from expensive companies in the growth index continuing to correct to a more appropriate valuation from the extreme levels reached over the preceding years. Yet EM value stocks remain very well positioned relative to growth, at a discount of 65% on PBK and 57% on PE, as compared to long-term average discounts of 53% and 34%, respectively, since 2000 (Exhibit 2). These current discounts are wider than at any other time in history other than the extremes of the past few years and the dot-com bubble.
Exhibit 2: Valuation Discounts in Value Are Wider than Almost Any Other Time in History
Source: MSCI, SBH. Price/Book and Price/Earnings measures for MSCI EM Value, MSCI EM Growth and MSCI USA through 3/31/24. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. Indexes are unmanaged and are not subject to operating expenses or other fees. One cannot invest directly in an index.
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