Stock Market

EM Equities likely to see a rebound from current levels

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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 the benchmark weight.

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.




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Category: Stock Market


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