In our last quarterly update, we highlighted the Banking sector in Europe as a potentially great contrarian investment opportunity for investors with some patience. This time around, we would like to highlight a region which we believe is currently offering the best risk/reward relationship for the long-term investor: Emerging Markets have historically speaking been a great buying opportunity following geopolitical tensions as often times they are short lived. We have always been a supporter of globally diversified portfolio allocations as well as and more importantly, the importance of the starting point of valuation when considering investments. Currently, we see the negativity surrounding Emerging Market and potential over-reaction of shortlived events as a “risk-off” move whereby the fundamental prospects of the individual companies are grossly mispriced. This has resulted in extreme valuation advantages to the Developed Markets in particular when looking at a well-diversified value basket. In addition to the valuation advantages, we see multiple fundamental improvements in the Emerging Markets taking place which are among others signs of improvement in China PMIs, freight rates, and diesel demand, to name a few. As a result of a potentially sounder economic environment, economists have started to project an acceleration of EM GDP growth vs. DM Growth this year. Finally and very important for the performance in the long-run, the move of EPS. Figure 1 below shows why EM has so poorly performed over past two years with a relatively big contraction in EPS compared developed countries, however with a solid bounce and reiteration in the last months.

As mentioned, we will next show several vantage points in regards to absolute and relative valuation of Emerging to Developed Markets. Despite the current market’s opinion of buying stories over fundamentals, we strongly suggest to consider these tremendous valuation gaps which currently persist in the market.

READ FULL ARTICLE