JP Morgan AM urges investors see opportunity in emerging market risk
Regression analysis points to double digit returns for investors over the coming 12 months, according to research published by JP Morgan Asset Management.
Political risk is one of the key risks associated with emerging market investing this year, JPMAM notes. The number of elections expected affects nearly a third, or 28% of total emerging market GDP, the manager says.
But, despite this type of risk, the outlook for the asset class remains strong, with factors such as urbanisation ratios in India and China still well below those of the US and Japan. Rising levels of income and consumption should drive market returns, JPMAM suggests.
Also in favour of emerging market investors are the low ratios. For example, the price/book ratio is below 1.5x on the MSCI EM index, which historially has seen double digit returns in the following 12 months. Emerging markets are set to hit five year lows according to these types of multiples, which suggests strong returns going forward.
Long term investors will therefore find the current period an interesting one, says Richard Titherington (pictured), chief investment officer, Emerging Markets Equities at JP Morgan Asset Management.
“There are always unforeseen risks in emerging markets and it is an asset class driven more by sentiment and confidence than others. After the strong performance of developed market equities in 2013, emerging market equities currently trade at the largest discount to developed market equities in nearly 10 years.”
With investments into companies rather than countries, it is important to take an active approach given the significant differences between emerging markets, Titherington adds.
“At the moment, buying EM is neither obvious or popular – but buy before it is obvious, because the obvious thing is almost always wrong. History suggests fortune favours the bold.”