While global stock market valuations appear rich, emerging markets may be a bright spot for long-term investors, PIMCO said in its global outlook for economies and markets.
Emerging market stocks have significantly underperformed economic growth over the past several years, and are now trading at a steep discount. History has shown stocks have typically outrun economic growth by about 2% on average and hence there is value, it said.
The following chart illustrate PIMCO’s thesis:
PIMCO’s analysis is a pointer to potential investment opportunities amid a run up in risky assets. S&P 500 touched an all-time high last week though it fell sharply after that amid worries over turmoil in the Trump administration.
Below is the fund manager’s view on investing in EMs:
For investors willing to accept the higher risks of investing in emerging markets, EM value strategies may offer long-term upside potential. And with PIMCO forecasting a more positive backdrop for EM economies, now may be an opportune time for investors to revisit their EM equity allocations.
PIMCO said emerging markets have largely recovered since the US election, when they bore the brunt of investors’ fears about protectionist policies.
“Now, growth is returning to these markets,” it said. “Improving trends in manufacturing and trade give us confidence that EM growth is likely to endure. In part, this is because a number of economies have already experienced economic adjustment primarily through depreciation of currencies.”
And this chart shows the improving sentiment:
It also said central banks in these economies had a higher leeway than their developed market peers to cut interest rates.
The fund manager said it has scaled back the possibility of full-scale trade war and the risk of a China “accident” as well.
As part of the report, PIMCO said it now expects global GDP growth to be in a 2.75%– 3.25% range this year, up from 2.6% in 2016 and a quarter percentage point higher than its previous forecast. The optimism is driven by improving manufacturing activity around the world and rebound in global trade, it said.