Investing.com — Emerging markets have long held the allure of rapid growth potential and diversified returns, but investors are often burned by volatility and the structural risks that come with it.
However, with changing economic fundamentals and global financial fluctuations, new assessments are required. So, are emerging markets finally buying?
According to analysts at the Sevens Report, emerging markets may be approaching the right time for investors to re-enter.
Several factors suggest that these markets are not only cheap but also ideal for a potential meeting. One of the important reasons is the current rating.
The has a front price-to-earnings ratio of 11.9, which is much lower than that of developed markets, such as the MSCI USA Large Cap Index at 22.1 and the MSCI EAFE Index at 14.0.
This large discount makes emerging markets attractive from a value perspective.
Investor sentiment, often a conflicting indicator, further bolsters the case. Sevens Report analysts point out that emerging markets are “hated,” evidenced by the unhealthy equity flows in these regions.
While US equity inflows in August reached $329.3 billion and international developed markets saw $38.6 billion, emerging markets held only $4.3 billion.
This extreme lack of enthusiasm, combined with poor valuations, may be the reason investors are looking before the tide turns.
Another good sign is the recent performance trend. Emerging markets have outperformed both the MSCI EAFE Index over the past two quarters.
This steady performance amid global market uncertainty indicates that the sector may be in the early stages of continued growth.
When you look deeper, there are many macroeconomic drivers driving this optimism. China and India, which account for nearly 50% of major emerging markets, are at the forefront of these changes.
In China, policymakers are introducing a series of stimulus measures aimed at reviving economic growth. These include rate cuts, reductions in bank reserve requirements, and more fiscal stimulus to come.
Meanwhile, India's demographics provide a major avenue for growth. With population growth, especially in the younger bracket, and political stability under the Modi administration, the country is positioned for long-term structural growth.
These factors are consistent with global changes. Interest rate cuts in major economies lower the value of the US dollar, which historically benefits emerging markets.
In addition, the trend toward sourcing restructuring—where companies “offshore” or “nearshore” their production closer to home or in politically relevant regions—could further benefit emerging markets.
For those considering entering the space, the Sevens Report outlines several investment vehicles, including ETFs that offer diversified exposure to these markets.
The Vanguard Emerging Markets ETF (NYSE: ), for example, offers broad, low-cost exposure, while the WisdomTree Emerging Markets High Dividend Fund (NYSE: ) focuses on income-generating assets in emerging markets.
