Investors should have modest expectations for emerging markets
in 2014, following three years of underperforming developed
markets and despite attractive valuations, says Credit Suisse's
Global Emerging Market Equity Strategy report released
IShares MSCI Emerging Markets Index (
) offers 6% upside from current levels, the report says. Credit
Suisse sees the upside limited by lower foreign inflow when the
Federal Reserve stops juicing the U.S. economy with quantitative
easing and a host of other obstacles.
EEM is down 7% year to date vs. gains of 26% by SPDR S&P
) and 14% byiShares MSCI EAFE Index (
), which tracks developed foreign markets.
The difference in emerging market growth over developed
markets is expected to be the smallest in a decade, according to
Credit Suisse. Corporate margins are shrinking because of rising
wages. And foreseen strength in the dollar would dampen returns
for U.S. investors.
best bets are overweighting China, Czech Republic, Hungary,
India, Poland and South Korea, while underweighting Chile,
Greece, Malaysia, Russia, South Africa and Thailand.
China's proposed reforms should resolve the three major issues
that troubled the
over the past three years: slowing economic growth, risk of a
financial crisis and risk of social instability. Economic
improvement could lift valuations for banks, one of the worst
performers of 2013. The reforms could reduce risk in the shadow
banking system and regulatory uncertainties.
China's price-to-earnings ratio is at a 15% discount to
emerging markets vs. a 10% premium on average the past 10
Leading economic indicators in Central Europe -- particularly
Czech Republic, Hungary and Poland -- indicate growth
reacceleration. Manufacturing orders have expanded along with
Germany's improvement in new capital goods orders. They're
enjoying the largest trade surplus since the formation of the
euro currency. Consumer confidence and retail sales are improving
along with real wage growth.
What's more, Czech Republic and Hungary's P/E ratios hover
near 15-year lows relative to the region. Poland's earnings are
expected to grow 1.5% in 2014 after tumbling 28% in 2013.
India's corporate earnings are expected to grow 18% in 2014
and 15% in 2015 vs. 12% and 10% for emerging markets overall.
Consumption among low-income people should be strong thanks to
rising wages, even though rising inflation and stagnant wages
will dampen spending among middle-income consumers.
The country's trade deficit is improving as is the currency.
India's P/E is trading at a 25% premium over emerging markets',
which is in line with the 10-year average.
South Korea's 2014 earnings forecast has been revised upward
from 12% to 22%, driven by globally recognized tech and auto
exports such as Samsung Electronics and Hyundai Motor. Emerging
market funds are more underweighted in South Korea than they have
been since 2000, presenting room for growth.
The government has introduced reform measures to support
consumption and the real estate market. "The Korean housing
market has already seen its bottom in late 2012 and is set for a
gradual recovery from 2014 onwards," Credit Suisse wrote.