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What We Are Observing: Emerging Market Valuations at Distressed Relative Levels

Chart of the Day:

Emerging Market valuations are cheap in absolute terms and appear at distressed relative multiples. Equity dividend yield on Emerging Market offers a positive yield spread of 1.14% over the Developed Market equity peers (3.4% for EM versus 2.2% for DM) – highest since Asian Crisis in 1998. Its price to book ratio is also trading at a 42% discount versus developed equity peers – the cheapest in relative terms in more than two decades, while offering just 15% discount return on equity.

Looking into Asia, the dividend yield spread between Asia Pacific ex-Japan and Developed Market peers has widened to the highest since GFC in 2008. MSCI Asia Pacific ex-Japan equities now offer a positive yield spread of 1.0% over the Developed Market:

Whilst strengths in US Dollar and Fed’s rate hike path are currently the major driving factors for the devaluation amongst emerging market equities, we believe EM’s underperformance will soon come close to an end as US rates peak in late 2022 / early 2023. From a statistics’ perspective, during each of the previous five occasions (Apr 2000, Apr 2003, May 2005, Oct 2008, and Nov 2015) when the spread touched 100bps (or close to 100bps as in 2015 case), MSCI Asia Pacific ex-Japan outperformed MSCI World by an average of 26% over the subsequent 24 months. In 4 out of the above 5 occasions the index recorded absolute positive 24-months returns impressively by an average of 60%!

As of the time of writing, Perinvest (Lux) SICAV - Asia Equity Hedge has a portfolio dividend yield of 6.4% (vs. benchmark at 3.2%) with a price-to-book ratio of 0.82x (vs. 1.39), with 2-year CAGR forward EPS growth of 24% (vs. 5.5%).


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