Emerging markets – the way ahead

Richard Titherington, CIO Emerging Markets at J.P. Morgan Asset Manager gives his view as to why there is still value in the Emerging Markets: "After Emerging Markets (EM) rose a stunning 75% (USD) in 2009, some investors may well be feeling a sense of vertigo. However, in our view, rather than be intimidated by that rebound, it is worth remembering that the 2009 rally commenced from valuation levels similar to crisis lows seen only a handful of times during the past two decades, and merely restored most measures of valuation to our notions of ‘fair value'.  As such, we expect another year of positive returns for EM equities, albeit more in line with long-term total returns in the low ‘teens, than anything of the order of last year's rally. From here, we expect earnings growth to be the primary driver of returns during 2010 and beyond, reflecting not only healthy economic growth but also improved corporate capital discipline (allowing profits to participate in economic growth).

Despite the fact that the financial crisis of 2008 was centered in the developed world (primarily the US), by the end of that year valuations in emerging markets were forced down to levels usually associated with EM-centered crises.  History has shown us that from the lows of those previous crisis valuation episodes, EM outperformed global equity markets in most instances, not only over one year but also over three and five years; hence history is on the side of continued EM outperformance.