Nomura: Emerging market stocks may outperform developed markets in 2019

World currencies

Valuations, improving growth differentials, positioning and healthy balance sheets all suggest emerging market equities have a favorable risk-reward outlook, compared with developed markets, Nomura said in a recent strategy note.

“The global macro backdrop is becoming more supportive of EM equities,” Nomura said in a note this month. “One of the major headwinds of EMs for most of this year was expectations of rising interest rates in the U.S. However, recent commentary from the Fed appears to have been quite dovish, which we believe is an excellent outcome for capital-hungry EMs, as it should reduce the capital outflows pressure Asia faced all this year.”

It noted that U.S. 10-year Treasury note yields have fallen from their peak of around 3.24 percent at the beginning of November.

Nomura also pointed to declines in oil prices, which it expected to be supportive for emerging markets, particularly Asia ex-Japan, which is largely a net importer of oil/energy, with the exception of Malaysia.

“Lower oil prices should also significantly improve the outlook for current account deficit countries in Asia such as India, Indonesia and Philippines – all large net-energy importers,” it said.

Nomura also noted that global equity investors’ positioning in emerging market equities was “relatively light,” based on EPFR surveys of global equity funds which show allocations to emerging market countries are close to 7 percent, below the historical average of 8 percent.

Emerging market valuations, on a relative and absolute basis, are attractive, Nomura added, and pointed to fairly healthy corporate balance sheets and expected growth differential improvements.

It said the MSCI EM index was trading at a 10.3 times forward price-to-earnings ratio, below the post-2010 and post-2004 average of around 11.0 times each.

“While EMs have traded at a discount to DMs since at least 2013, it is worth highlighting that the current valuation gap between EM and DM is almost 25 percent, which is even lower than the average historical (since 2004 and 2010) EM discount of 20 percent,” Nomura said.

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