Emerging Market Stocks Will Shine Next Year

[Asia Economy Reporter Song Hwajeong] Emerging market stocks have underperformed advanced markets this year, but are expected to improve next year.

According to KB Securities on the 6th, the momentum for a rebound in investment sentiment in emerging market stocks next year is attributed to large government spending in advanced countries, fiscal expansion in China, and valuation attractiveness.

Lee Changmin, a researcher at KB Securities, explained, "In 2022, as advanced countries' central banks are expected to open the curtain on tightening policies, concerns about liquidity withdrawal will lower asset prices in emerging markets, but the intensity of the adjustment will be limited," adding, "Emerging market risks have been reflected in investment sentiment and performance over a long period."

The economy is expected to undergo structural changes after COVID-19. The researcher said, "Major advanced countries such as the U.S. and Europe will continue growth through the role of large governments, and China will continue its confrontation with the U.S. but will attempt various policy changes such as fiscal expansion aimed at common prosperity." Emerging market central banks will also raise policy rates in response to the U.S. Federal Reserve's (Fed) rate hikes, but a rapid rise to pre-COVID-19 levels is unlikely. Except for some countries like Russia and Brazil, inflation is stable, and premature normalization of interest rates could hinder economic recovery. The researcher analyzed, "Indonesia, which has conducted vaccinations and has stable inflation, lowered its policy rate this year, and foreign investors have expanded net purchases in the second half. The time has come for funds to flow into Southeast Asia, where COVID-19 response was delayed due to vaccine shortages."

There is an opinion that it is time for emerging market stocks, historically undervalued compared to advanced market stocks, to shake off long-term sluggishness and rebound. The researcher said, "While global economic momentum is weakening, the proportion of stocks with increased price burdens due to continued stock market rises has grown," adding, "Considering the interest rate normalization event, investment sentiment that favored growth will also reach a turning point." Earnings forecasts, which are a price-determining momentum, are also favorable. The MSCI Emerging Markets Index's earnings growth rates for 2022 and 2023 are 5.1% and 9.6%, respectively, not lagging behind the MSCI World Index's 6.6% and 7.2%. The researcher analyzed, "The relative strength of valuations between advanced and emerging markets calculated by the 12-month forward price-to-earnings ratio (PER) is at a 10-year high, indicating that emerging market stocks are significantly undervalued," adding, "Especially, earnings forecasts for the previously underperforming Asian stock markets are recovering rapidly."

On the other hand, rapid Fed tightening, a strong dollar, and concerns about China's debt are risk factors for emerging market stocks. However, while these risks may cause shocks, they are unlikely to trigger a bear market. The researcher said, "Various uncertainties persist, but these are variables that have been prepared for over a long period and reflected in prices," concluding, "In 2022, significant investment in emerging market stocks, where price attractiveness and earnings growth coexist, will be effective."

This content was produced with the assistance of AI translation services.