After taking a pummeling in the first half of 2013, emerging market equities are now poised to deliver better investment returns, a new report predicts.
Russell Investments makes this claim in the third quarter 2013 report of “Strategists’ Outlook and Barometer.” The research outlines the investment strategy outlook and economic prospects for the global economy.
“It’s been a tough first half of the year for [emerging market] equities,” the report states. “The near-term outlook remains challenging, but prospects for the medium term look better. Attractive valuations, an export recovery and stronger global growth should eventually deliver better returns.
“Valuation is a moderate positive for U.S. equities, stronger for Europe and Japan, and strongest for emerging markets,” the report adds.
Russell Investments’ Emerging Markets Index recorded a return of -7.9 percent in the first six months of 2013 through June 30 compared to +9.1 percent for the Russell Developed Index. The report attributes the decline in the first of the year to a decline in commodity prices, a strengthening of the U.S. dollar and monetary tightening in China. Also depressing equity valuations for the region was a “sharp devaluation” of the Japanese yen, which undercut the competitiveness of Asian economies.
However, the report describes emerging market equities as now “valued attractively,” as they’re trading at a 20 percent discount relative to developed market stocks and below the average 5 percent over the past 10 years. Emerging market equity valuations, the report adds, should rise in tandem with an anticipated strengthening of EM exports, a stabilizing of China’s economy and continuing strong demand for emerging markets’ commodity exports.
Turning to the U.S., Russell Investments expects a roughly five percent growth rate in U.S. large cap earnings per share over the next 12 months through June 30, 2014, a rate half that of the “bottom up” industry consensus.