Morgan Stanley is calling for investors to overweight emerging markets equities, perhaps emboldened by a contrarian streak after the investor exodus from the BRICs. It’s their first change to Asia/Global Emerging Markets (GEM) asset allocation since June 2009:
- Raise our equities overweight to 6% from 4%. This returns our equities OW to where it was during the 300 April-May 2009 period.
- Reduce underweight in EM local currency debt from 4% to 3% (proxy GBI-EM).
- Reduce cash from 5% (neutral) to 2% (underweight).
Here it is, their new allocation weightings. Their cash weighting is now almost non-existent:
Here’s the most interesting chart from their piece. It basically shows how despite the global concerns which have emerged recently, strong earnings results have lead to rapidly increasing 2010 earnings per share (EPS) growth forecasts for the full year. The underlying earnings fundamentals have become far stronger in the last two months despite the gloom out of Europe and concerns regarding China tightening.
As a result, forward price to earnings ratios (PE) have fallen to historically low levels.
Our caveat though will be that emerging markets stocks are one giant cyclical play, thus PE’s based on a single year’s forecast can change quite quickly if the global economy doesn’t deliver as expected.
Yet still, even on a more stable price to book value (PB) valuation metric, emerging markets don’t look expensive.
And keep in mind that while developed world is facing growth challenges, esp. Europe and Japan, emerging markets are still powering ahead. BRICs are leading the way:
(Via Morgan Stanley, Asia/GEMs Strategy, Jonathan Garner, 26 May 2010)
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