Will the MSCI Emerging Markets index become the next big thing?

Investors who have an overexposure to US shares in their portfolio have not been complaining in recent years. The US stock market has proved to be the top star performer by some way. It has outperformed the European stock markets and those of emerging countries such as China and India. This is primarily due to the technology sector!

Will the party continue? Or are we about to witness a changing of the guard? A brief analysis by Geert Van Herck, Chief Strategist at Keyprivate.

“The US stock market has easily outperformed the stock markets of Europe and of emerging countries such as China, India, South Africa, South Korea and Russia in recent years. This strong performance by the US was delivered by technology companies such as Apple, Amazon, Microsoft, Facebook, Google and Netflix. Many stock market analysts are increasingly wondering whether the US can continue this over the next five to ten years.

The flip side of the coin is the fact that the US stock market's success has made it expensive according to many well-known valuation ratios. Table 1 shows five common valuation ratios for the S&P 500 compared to the MSCI Emerging Markets. More and more stock market analysts are seeing potential in these emerging countries. Their modest performance over the past few years makes them seem cheap. However, valuation is and remains an important criterion for projected returns. The cheaper they are, the higher the expected returns from investments in different economic regions. On the other hand, the more expensive they are, the lower the returns.

Table 1: S&P 500 versus MSCI EM valuation

Source:Vanguard

Note:

• Price/Earnings = share price/earnings
• Price/Book = share price/asset book value
• Price/Sales = share price/turnover
• Price/Cash Flow = share price/cashflow
• Dividend Yield = dividend payments

The valuation overview in Table 1 makes it clear that emerging countries could be attractive for investors. This makes it all the more striking that although the MSCI Emerging Markets is cheap, a number of big names from the technology sector are heavily weighted in the index. As in the US, the technology sector is the largest one in the index (see Table 2), but it can be bought a good deal more cheaply here. The 10 biggest names from the index. include well-known names such as Alibaba and Samsung. These companies have taken over the role of, for example, the Brazilian oil company Petrobras or other large commodity companies that have been determining the ups and downs of emerging countries for many years."

Table 2: S&P 500 (SPY) versus MSCI EM (EEM) sector weightings

Source: iShares & Vanguard

What can we conclude from this?

The champagne performance of the US stock exchange has made it expensive. What has remained under the radar is the fact that technology lovers can now enter this sector cheaply via stock exchanges in emerging countries. This is easily done using a tracker. We have already taken an initial position for our KEYPRIVATE discretionary asset management in the more dynamic profiles.