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Betting on emerging markets

JP Morgan’s global strategist has just moved “overweight” on emerging markets, according to Adrian Mowat, Chief Asian & Emerging Market Strategist at the firm while in conversation with CNBC-TV18.

He was of the opinion that the recovery in emerging markets vis-à-vis developed markets is at a “very early stage.” He noted that if we look at the relative bear market in emerging markets as compared to developed markets in the context of the past five years, “positioning is still very bearish in emerging markets.”

Emerging versus developed market equity performance

For comparing equity performance of developed and emerging markets, we have chosen the iShares MSCI EAFE ETF (EFA) and the iShares MSCI Emerging Markets ETF (EEM), respectively.

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From 2011 until 2016, the EFA and the EEM have beat one another three times each. However, except for 2016, the outperformance of developed markets has been much sharper than that of emerging markets.

2017 has seen emerging markets bettering their developed market peers to begin the year. But even then, emerging markets look cheaper with the price-to-earnings ratio of the EEM at 13.28, lower than 18.36 for the EFA. The higher returns of the EEM have come with higher volatility, though.

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Flows expected

Mowat expects fund flows into emerging markets in 2017. He said that open-ended emerging market funds have seen outflows from 2013-2015 with flows in 2016 being “basically neutral.” He was “very positive” on emerging markets witnessing inflows for the next couple of years as these markets are “offering premium growth.”

Investors have been warming up to emerging markets throughout this year with Bloomberg data showing that net inflows to emerging market ETFs listed on US exchanges standing at over $7 billion in the year so far. In the past one-year period, net inflows to emerging markets have been higher than those to developed markets by $300 million.

After a background on where JP Morgan stands on emerging markets, Mowat was questioned about their stance on India. Let’s look at that in the next article.

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