At a time when global market stock valuations appear stretched relative to their earnings growth, asset managers continue to repose faith in the emerging market (EM) asset class.
Despite the tariff uncertainties, EM equities are on the radar of investors driven by the relative strength of domestic economies, better earnings prospects of companies, weak US dollar, underrepresentation of the asset class in global portfolios, and faster growth of new economy sectors such as artificial intelligence.
For instance, Aberdeen Investments recently said it is positive on emerging market equities, especially Asian equities, amid geopolitical uncertainty and investors’ overexposure to US technology stocks.
“Emerging markets, in particular Asia, is becoming an increasingly attractive destination for investment and diversification,” Devan Kaloo, global head of equities and head of global emerging market equities said.
Emerging market equities show resilience as domestic growth drivers strengthen, the fund house said. Among EM equities, Aberdeen believes the domestic momentum will remain the key driver of Chinese equity performance as it expects further support measures. “With interest rates staying low, domestic retail investors are likely to seek higher-yielding assets, making equities a prime destination for capital,” Kaloo said.
While the fund house finds the valuation of AI-related stocks elevated, it believes there are opportunities to tap into in China, which it believes is in the early stages of its AI journey. “There is ample room for Chinese tech companies to catch up with their global peers from a technical standpoint.”
Notwithstanding the impact of huge US tariffs on India, the fund house favours the market due to its domestic-driven economy. It expects India to register double-digit growth, outpacing China and EM peers, anticipating “modest impact of US tariffs, as 80% of the economy is domestic-driven.
“Long-term growth is underpinned by a rising middle class and one of the world’s largest consumption markets,” according to Kaloo.
Meanwhile, Aberdeen also finds emerging markets an appealing destination for meeting the income needs of investors. According to the firm, dividend payouts from companies in emerging markets have grown at a compound annual rate of close to 12% over the past two decades, outpacing developed markets.
“As the global economy enters a new investment cycle shaped by structural shifts, such as tariff realignments and technological transformation, we believe EMs are poised to benefit. From tech hardware and infrastructure to domestic consumer brands, the opportunities are broad and deep,” said Isaac Thong, senior investment director of Asian equities.
Fiera Capital, an independent asset manager, is also among investors that find EM universe attractive.
Fiera sees “first signs” of improved returns from emerging markets compared to developed market counterparts. It finds valuation of emerging markets cheap as in the beginning of the 2002 bull market run.
EM companies’ faster earnings per share growth than developed markets, stretched US equity valuation, and global funds’ lower allocation to EM are among the reasons that it finds the EM asset class appealing.
A weak US dollar drives emerging markets outperformance and emerging markets currencies are cheaper now than they were in 2018, according to Fierra. Moreover, new economy stocks have grown faster over the last decade in EM than in the US with AI-related sectors now accounting for about 20% of EM revenue, it said.
