Emerging market (EM) stocks have surged 60 per cent since early 2016 but equity strategists at Bank of America Merrill Lynch (BofA-ML) believe there are more legs to the rally.
“We think a potential doubling is likely in the next two years, to mirror the trajectory of prior bull markets,” say its equity strategists Ajay Kapur, Ritesh Samadhiya and Aritra Baksi.
The note containing their analysis says this bull market in Asian and EM equities is similar to six others since 1976. The average rise has been 3.3 times in bull markets, lasting 42 months, leaving room for sharp rises from even the current levels.
How will the current rally end? “It is likely to end similarly — crushed by recession or exhausted by overvaluaion of three times the price-to-book (PB),” say Kapur, Samadhiya and Baksi, who are based in Hong Kong.
Since 2016, EM equities have outperformed global ones by 27 per cent.
“We think a substantial overweight in Asia/EM
equities is warranted. We recommend investors to raise exposure if they haven't already and sell when valuations reach three times the PB or when they expect a US, global or Asian recession. Let the bull market do its job,” the note says.
Within the EM space, the brokerage has its biggest overweight on South Korea, China and Taiwan. Philippines, India and Malaysia are the biggest underweight.
The bank’s analysts, however, also have riders to their EM equities thesis.
This time, they say, “global growth is slower; so, peak multiples should be lower”. Also, “monumental geopolitical, policy and disruptive challenges pose threats like never seen before”.
Other risks include, “the bottom-up analysts are not so bullish; China has massive imbalances and is a crisis in waiting, and this is a bizarre bullish call, given that global central banks are going to tighten”.