Time to reconsider emerging markets: J P Morgan

CIO Richard Titherington says the recovery in the emerging markets would be led by manufacturing-intensive exporters

With the growth differential between the emerging markets and developed markets expected to narrow, J P Morgan's Richard Titherington believes that emerging markets are back to being attractive once again.

According to Titherington, chief investment officer of Emerging Market Equities, valuations in the emerging market equities have already taken into account many of the concerns surrounding emerging market growth and geopolitics.

"Investors should consider maintaining, or even increasing, their direct exposure to emerging market equities. The asset class is trading at an attractive valuation level relative to its own history, as well as relative to developed markets," he said in a client note titled "Think ahead of the curve - The case for re-risking into emerging markets".

As per the note, valuations in emerging market equities are currently at 1.5X P/B, at the low end of the historical trading range. Emerging market equities are expected to see further upsides from these levels, it said.

Titherington believes that in the current era of globalisation, it is difficult for one part of the global economy to experience growth while another major part continues to decelerate. So with growth recovering in developed markets, emerging markets would also likely benefit from it and follow suit.

"...we believe we are close to an inflection point where growth in emerging markets and developed markets will begin to reconcile, translating into better earnings in emerging markets and leading to a re-rating of emerging market equities," he said.

The recovery in the emerging markets would be led by manufacturing-intensive exporters because these sectors would be the first to align growth with that of the developed markets. As export growth in the developed world picks up, these sectors would start benefitting from the growth in employment, incomes and domestic demand, he said.

For investors looking at opportunities in the emerging market asset class, active management will play an important role in identifying the investment opportunities, the note said.

"Companies in emerging markets should begin to deliver stronger profits as the macroeconomic backdrop improves and economies regain momentum. Active management will play an important role in identifying the relevant headwinds and attractive investment opportunities," he said.

Emerging market covers regions across Asia, Latin America and EMEA (Europe, Middle East and Africa).