Sluggish Emerging Market Stocks, When Will the Investment Opportunity Arise?

[Asia Economy Reporter Song Hwajeong] Amid the continued weakness of emerging market stocks compared to developed countries, it is expected that a rapid rebound will be possible if the risks weakening investment sentiment in emerging markets improve.

According to KB Financial on the 11th, the Morgan Stanley Capital International (MSCI) Emerging Markets Index, a representative index of emerging market stocks, is underperforming the MSCI World Index, which represents developed market stocks. Since the first quarter of this year, the performance gap between the two indices has widened, with the slowdown in semiconductor export momentum and tightening monetary policies contributing to the sluggish performance of the Korean stock market. Inflation and tightening concerns, China's economic slowdown and increased government regulations, as well as the strong dollar, have also negatively impacted emerging market stock performance.

If these major risks ease, a rapid rebound in emerging market stocks is expected. Concerns about earnings per share (EPS) decline are low. The MSCI Emerging Markets Index's earnings growth rates for 2022 and 2023 are 4.7% and 9.7%, respectively, comparable to those of the MSCI World Index. Lee Changmin, a researcher at KB Securities, stated, "The relative valuation of emerging market stocks compared to developed market stocks is at its highest level in 10 years," adding, "This can be interpreted as emerging markets having priced in a significant portion of the complex domestic and external risks."

As domestic and external variables are reflected differently in emerging market stocks, the correlation between stock markets has significantly decreased. Therefore, country selection has become more important than ever in emerging market investments. Lee said, "In the long term, we present a positive view on China (Hong Kong), which reflects exposed risks; India, where reforms have somewhat retreated but earnings growth remains solid and exposure to China is low; Indonesia, expected to benefit from rising prices of raw materials such as coal; and Brazil and Russia, whose absolute valuation attractiveness has increased due to the reflection of domestic and external geopolitical risks." He added, "Conversely, Thailand, expected to suffer from the normalization of tourism due to concerns over the spread of the Omicron variant, and the Philippines, where the fatality rate is rapidly increasing due to the lack of quarantine policies, are given neutral or below-neutral investment opinions."

The delay in supply chain recovery due to the emergence of Omicron is cited as a risk factor for emerging market stocks. Lee analyzed, "The emergence of Omicron may weaken expectations for supply chain recovery," adding, "If the threat of variant viruses prolongs, emerging market supply chains are likely to face continuous pressure, which could increase inventory accumulation demand and lead to intensified inflation."

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