Depressed Valuations in Emerging Markets Offer Opportunities

Most EM stocks are trading at big discounts to those in developed markets, especially the U.S., but managers caution that the gap won’t close overnight.

Institutional Investor

December 30, 2014

By Robert Stowe England

Most emerging markets have been out of favor in recent years while U.S. equities have shown impressive gains, creating a divergence between developed and emerging markets. For Rob Arnott, that spells opportunity.

Arnott, chairman and CEO of Research Affiliates, a Newport Beach, California, firm that specializes in smart beta strategies, says a number of developments have led investors to pull back from emerging markets. “You have Putin on the march in Eastern Europe,” he says of Russian President Vladimir Putin. “You have the shadow banking system in China looking distinctly fragile. You have elections across Latin America shifting step by step in a more socialist direction. You have blood in the streets ­— literally, not figuratively — across the Middle East.” And to top matters off, Saudi Arabia sent falling oil prices plunging in November when it refused to curtail production.

The recent sell-off may offer a rare opportunity for courageous investors to increase exposure to emerging markets at deep discounts, says Arnott. Although investors can’t know when the bear market in EM equities will end, emerging markets are “priced to provide some pretty remarkable forward rates of return,” he contends.

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Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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