Emerging Markets Are 20% Cheaper Than Developed Markets, Says Mobius 2

Emerging markets offer attractive valuations

Over an interview with Bloomberg on June 22, Mark Mobius, executive chairman of Templeton Emerging Markets Group, discussed the current attractiveness of the emerging markets (EEM) (VWO). Mobius finds developing economies to be far cheaper than developed markets (EFA) (VEA). He pointed specifically to the valuations to illustrate, “Emerging markets are roughly about 20% cheaper if you look at P/E, P/B, and earnings growth.”

Emerging markets are 20% cheaper than developed markets

Frontera looked at the forward price-to-earnings ratio which is a fair reflection of what price the market is ready to pay for the earnings that it expects from a particular market segment. Accordingly, the MSCI Emerging Markets Index’s forward P/E lay just about 20% below the forward P/E of the MSCI EAFE Index (which tracks developed markets’ equity) (see chart above).

Valuations are good

Mobius also talked about growth in emerging markets being far above that offered by developed markets. “Emerging markets on average are growing at 4-5%. Places like India and China are growing at 6-7%,” he said. As of 1Q17, developed markets such as the US and the Eurozone recorded growth rates equal to 2.1% and 1.9%, respectively, on an annual basis. China (FXI) (YINN) grew at 6.9%, while India (EPI) recorded a 6.1% growth rate for 1Q17.

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So, higher growth at lower prices (indicated by the lower P/E ratios) does bring a good bargain to the table. “Definitely the valuations are good,” remarked Mobius.

Word of caution for investors in Chinese equity

While Mobius maintained his bullish stance on China, he also cautioned investors of valuations coming from China, specifically citing that a lot of technology companies now comprise a larger share of the market when it comes to China. These companies tend to have higher P/E ratios, so in a way they’re inflating the entire index. However, Mobius believes that valuations in China are lower overall, despite the effect of the technology powerhouses on the P/E ratio of the market.

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