This is the toughest decision this year – we can no longer justify recommending a 3 percent overweight in Global Emerging Markets. We have therefore decided to reallocate the 3 percentage points to global equities.
Are Emerging Markets equities overvalued? In absolute terms, our answer to that question is no. However, in relative terms, they are getting there! Importantly, we think most of the fundamental story has now been priced in and further upside from here will most likely involve increasing levels of exuberance. Consequently, we find ourselves in a situation where we can no longer recommend putting new money into GEM at the current point in time, unless the investment time horizon is longer than usual and, crucially, risk tolerance is high.
EM (on the face of it) seems to have decoupled completely, in terms of economic growth as well as in terms of equity market performance. The latter, especially, is causing us a severe headache. The broad EM equities are starting to look stretched on a number of metrics (a few of which are shown in this publication). To us there are two important points. The first is valuation and the second is market sentiment. EM equities no longer trade at a discount to developed equities (in fact they trade at a premium on a number of factors). Is that a problem? No – we think it is fully justified by the superior growth outlook and the structural changes across EM economies.