The Bottom Line
- Investors in Emerging Markets (EM) stocks could be forgiven for being gun-shy after a rough 2018, with EM index returns ending the year down -16.6%.1
- In that context, the 7.2% updraft between Dec. 26 and Jan. 21 might feel less than entirely satisfying.
- But the flip side of that modest gain is that there are still good reasons to revisit the sector -- starting with valuations.
- Most notably, the price-to-book ratio – a valuation measure that’s less susceptible to earnings manipulation than the standard P/E ratio, and frequently used to evaluate international stocks – stood at 1.46, vs. 2.12 for the world’s developed markets, as shown above.2
- That’s a big difference, given that both sectors are currently delivering a very similar return on equity, at 13.8% and 13.1%, respectively.
- That backdrop suggests there’s opportunity for long-term EM investors like Legg Mason’s Martin Currie to purchase stocks at attractive prices in companies in these markets – on a selective basis, in keeping with their active approach.
- For more insight into Emerging Markets now, read Martin Currie’s 2019 outlook – “Current Volatility, Long-Term Opportunity.”
1 Source: Bloomberg. MSCI Emerging Markets Index, Jan 1 – Dec 31 2018.
2 Note that Martin Currie’s figures are as of 12/31/18; the figures in their 2019 Outlook are as of 10/31/18.
Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.
The price-to-book (P/B) ratio is a stock's price divided by the stock’s per share book value.
The price-to-earnings (P/E) ratio is a stock's (or index’s) price divided by its earnings per share (or index earnings).
Return on Equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity.
The MSCI Emerging Markets (EM) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
The MSCI World Index is an unmanaged index of common stocks of companies representative of the market structure of 22 developed market countries in North America, Europe, and the Asia/Pacific Region.