INSUBCONTINENT EXCLUSIVE:
If relative valuations are an indicator, then emerging markets (EMs) are likely to rebound from their current levels
The price-earnings multiple (P/E) of the MSCI Emerging Market index currently trades at the upper end of the range of 25-34per cent
valuation discount over the SP 500 valuation
In the past five years, the MSCI EM index has rebounded 10-15per cent every time it traded at such valuations
Also, the difference between the two multiples has reached to seven
In the past 13 years, the index has risen significantly whenever the P/E difference was seven-eight.
The possible rebound in the index may
accentuate the outperformance of Indian equities
Indian market has outperformed the MSCI EM index by 18per cent in the current year so far
This has been the most considerable outperformance in the past four years
The MSCI EM index has dropped by 9per cent so far in 2018.
The index has seen sharp sell-off following volatile currencies due to global
tariff war and rising US yield
However, the technical picture of the MSCI EM currency index, too, signals a rebound
Fibonacci analysis, a technical tool to evaluate trend corrections, shows the current reading of the index between 50per cent and 61.8per
cent retracement area, which typically signals a rebound.
Besides, large investors such as Franklin Templeton Investments and BlackRock hint
at cheap stock prices, rising corporate profits and strong fundamentals of the EMs may outweigh headwinds from tariff war and rising
dollar.
India’s weight in the MSCI EM index is currently at 9per cent and EM fund managers have 125 basis points higher allocation than
Historically, during the outperforming periods, the EM fund managers are overweight on Indian equities to the tune of 400-500 basis points
This bodes well for Indian equities
