Emerging markets to deliver over 100% returns in two years, says BofA-ML

Even as Asian markets are ruling at their decade high levels, there is enough room for them to deliver over 100% returns in the next two years, believes foreign brokerage BofA-ML, advising investors to raise exposure, if they have not already.

"EM equities are already up 60% since January 2016 in this bull market, and we think a potential doubling is likely in the next two years to mirror the trajectory of prior bull markets," said BofA-ML. 

If history is a guide, EM equities rise 230% on average, in bull markets that last about 42 months, at three times the pace of the rise in the S&P500 in the same period, the brokerage pointed out.  

In a note to clients, the brokerage said that global investors have largely missed the 27% outperformance of EMs over global equities since January 2016 and said a substantial overweight in Asia/EM equities is warranted. 

BofA-ML noted that the ongoing bull run in emerging markets is little different from the six that came before it since 1976, and may be stopped by recession or be exhausted by overvaluation of 3 times their price-to-book (PB). 

It recommended investors to raise exposure to EMs if they haven't already, and sell when valuations reach 3 times price-to-book (PB), or when they expect a US/Global/Asian recession. Let the bull market do its job, it said. 

The brokerage further highlighted the five potential pushbacks that may take the indices lower: 1) global growth is slower, so peak multiples should be lower, 2) monumental Geo-political, policy and disruptive challenges pose threats like never seen before, 3) the bottom-up analysts are not so bullish, 4) China has massive imbalances and is a crisis in waiting, and 5) this is a bizarre bullish call, given that global central banks are going to tighten.

The brokerage also highlighted a few risks to the markets. A recession in the US, or globally, or in Asia/EMs, an armed conflict in Asia or if China goes into deflation, and/or experiences capital flight, and/or a credit crisis erupts that cannot be contained, may hit the markets on the downside. 

The brokerage also sees anti-trust action breaking up or taxing Asia's oligopolies, especially in the internet sector, and the confiscation of Asia's massive corporate free cash flow (estimated at $330 billion in 2018, or 6% of sales) by the governments for public service as a risk to the markets. 

The brokerage, however, maintained that corrections and pullbacks are inevitable, so investors should use them to buy.