(Bloomberg) — For the first time in at least two decades, emerging-market stock valuations have fallen to less than half those of US equities, a sign to some investors that there are increasingly attractive opportunities in developing economies.
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After pulling back from an all-time high in late June, the MSCI Emerging Markets Index is valued at 9.9 times estimated earnings for the next year, while the S&P 500 Index fetches a multiple of more than 20.
The record discount reflects the raging bull market in US artificial-intelligence stocks and a deepening underperformance in China and Hong Kong, which account for more than a fifth of the emerging-market benchmark by weight. This year’s developing-country gains have come mostly from AI companies in South Korea and Taiwan, prompting some investors to bet the rest of the asset class may lead further advances.
“Suffice it to say, the US index looks historically rich and concentrated,” said James Athey, a money manager at Marlborough Investment Management. “Buying MSCI EM is one way to diversify away from the US.”
Athey said he prefers to avoid the volatile, cyclical tech stocks in Asia to focus on Latin America, “where I see more value alongside economic, political and macro tailwinds over a more medium-term horizon.”
The MSCI EM Index has rallied 19% this year, with most of the gains coming from SK Hynix Inc. and Samsung Electronics Co. in South Korea and Taiwan Semiconductor Manufacturing Co. But since the end of February, when the Mideast conflict erupted, the MSCI gauge has risen just 3%, compared with a 13% jump in the S&P 500.
The period has also seen sharply divergent performances across EM regions. While Asia has dominated day-to-day moves, Latin American stocks have been virtually unchanged, while those in emerging Europe, the Middle East and Africa have posted modest returns.
Valuations are also widely dispersed. While Taiwan, India and Hong Kong’s technology sector trade at 17 to 18 times estimated earnings, and mainland China stocks fetch less than 14 times, several emerging markets are stuck in single digits: Brazil trades at 8.2 times, Argentina at 8.6, Dubai at 9.4, Turkey at 4, Philippines at 9.5 and Egypt at 8.