Emerging Markets Currently Offer More Bang for the Buck
Global Equity FVMR Snapshot – October 2016
Fundamentals
The consensus estimate for 2016 ROE has been adjusted upwards for Emerging Markets and is now at 11.2% (versus 10.8% in August). Developed Markets with ROE of 11.7% are only more profitable in terms of ROE than Emerging Markets because of the US.
Looking at Developed non-US the ROE becomes 9.4% versus Emerging Markets at 11.2%. Latin America is the most profitable region among Emerging Markets with an expected ROE of 11.8% in 2016.
Besides Japan, companies in Developed Markets pay out more of their profits to shareholders relative to Emerging Markets. Developed Europe has the highest dividend payout ratio at 58% in 2016 versus the World average at 44.3%.
Valuation
US increases the valuation of Developed Markets, trading at 2016 17.7x PE and 2.1x PB. If we exclude the US, Developed Markets trade in line with Emerging Markets on price-to-book. Developed non-US still trade higher on 2016 15.8x PE versus Emerging Markets at 13.6x PE.
Similar to the US bringing up valuations for Developed Markets, Emerging Europe has a dirt-cheap valuation that drags down Emerging Markets. Taking ROE into account, we then can see that Emerging Markets are more attractive than Developed non-US.
Looking at ROE/PB, we then can see that Emerging Markets at 2016 7.4% ROE/PB are more attractive than Developed Markets at 5.7%.
Even though Developed Markets have higher ROE, it’s less attractive on ROE/PB. Most ROE for the price-to-book you pay you’ll find in Emerging Europe where you get 13% ROE for every unit of PB.
Momentum
Consensus expects earnings growth to be slow in 2016 more or less across the board. The two standing out is Latin America that is expected to rebound and see EPS grow by 52.7% in 2016, and Japan where earnings are expected to grow by 11.9%. Consensus has a more positive outlook for 2017 where EPS across the globe is expected to grow by about 13%.
The past 2W price performance has been weak across the board, ranging from -1.0% in Emerging Europe to 1.6% in Latin America, and -0.4% on average for the World.
Risk
Gearing, in terms of net debt-to-equity, in Latin America has decreased to 63.1% in the past 12 months from 81.7% in 2015, though it’s still highest in Emerging Markets. North America is the only region where gearing has increased in the past 12 months relative to 2015.
Price volatility in the past 3M has been higher in Emerging Markets; driven by volatility in Latin America. Japan has been the most volatile in the past 3M though. Comparing 3M volatility to 1Y volatility, we can see that volatility has decreased in the World markets.
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