The investible emerging markets equity universe has experienced a seismic shift over the past decade.
Major markets have moved from being very globally exposed and cyclical, to more of a mix of global information technology and local consumer-driven stocks. That shift has clear implications for the changing risks that drive emerging markets investors’ returns, of course. But it should also encourage us to think again about how emerging markets are valued - relative to developed markets, but also relative to their own history. Emerging markets may not be as expensive, or as cyclical, as one might think.
From commodities to computers
The shift in the investable markets has resulted in a shift in the MSCI Emerging Markets Index. At the end of 2007, energy (18 per cent) and materials (15 percent) accounted fully for one-third of the index. Fast-forward to 2017, and those two sectors account for only 14 per cent. Information technology has risen to 28 per cent of the index from 10 per cent, partly through faster growth and partly because MSCI included China’s predominantly technology focused American Depositary Receipts (ADRs) in the index during 2015-16.
Commodity-driven markets such as Russia and Brazil have declined as a proportion of the index, while China, increasingly represented by internet software and services stocks, has grown. At the end of 2007, China accounted for 16 per cent of the index, and Chinese tech companies 0.3 per cent; by 2017 China had a 30 per cent allocation and China tech accounted for 12.3 per cent of the index.
The shift to information technology in the investable markets better reflects the “real” economy and consumer behavior within it, both now and especially in the future. But how should one value emerging markets, given this radical change?
A changing profile implies changing views on valuation
We might expect the MSCI Emerging Markets Index to have become less attractive on a valuation basis, relative to both its history and to the valuation in developed markets.
In fact, the MSCI Emerging Market Index not only trades at a lower price-to-equity ratio than the MSCI World and S&P 500 Indexes, it has also been getting relatively cheaper for the past six years, even as its exposure to the technology sector has grown.
Broad technology-sector valuations are in the middle of their own 10-year historical range. Valuations in internet stocks are rich, but the hardware and semiconductor industries are trading cheaply relative to their history, probably due to the past boom-and-bust cycles in these sectors. We would argue that these companies should not all be painted with a broad brush, however, as certain sub-segments are benefitting from an entirely new theme of technology and semiconductor proliferation in autos and other appliances.
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Compare the US and emerging markets energy, material and technology sectors using price-to-earnings ratios and estimated five-year earnings-per-share growth, and the picture becomes even clearer. First, the three Emerging Markets sectors trade more cheaply relative to their US counterparts.
Second, outside of US energy, which is coming off a lower earnings base, they also have stronger earnings growth. When we go back up to the index level again, we can see this dynamic playing out in price-to-earnings growth ratios. In developed markets, this ratio sits at around 1.5, whereas in emerging markets it is less than 0.8. Technology stocks in the emerging markets are cheaper, even though their earnings are growing faster.
Strong Growth Is Not Without Risk
This dramatic change in emerging markets does come with an element of concentration risk. The top four holdings in the MSCI Emerging Market Index are all technology firms—and the fifth has a 30 per cent stake in the first. Together, they account for nearly 20 per cent of the index.
The top five stocks in the S&P 500 Index are also dominated by technology today, but by contrast they account for only 12 per cent of the index. Having said that, the sector as a whole accounts for 28 per cent of the MSCI Emerging Markets Index, versus 26 per cent of the S&P 500. While concentration has increased we do not believe it is out of sync with other markets.
We view emerging markets as an attractive investment opportunity, especially on a relative-value basis. We like the superior growth characteristics of technology, and we would argue that, with earnings growth led by sectors that are not solely dependent on the global economic cycle and global trade dynamics, emerging markets exhibit a very different profile now than they have had in the latter stages of previous global cycles.
Conrad Saldanha is Senior Portfolio Manager - Emerging Markets Equity at Neuberger Berman, which is a member of The Gulf Bond and Sukuk Association.
Specs
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Range: 400km
Power: 134bhp
Torque: 175Nm
Price: From Dh98,800
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Killing of Qassem Suleimani
Paris Can Wait
Dir: Eleanor Coppola
Starring: Alec Baldwin, Diane Lane, Arnaud Viard
Two stars
The National's picks
4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young
IF YOU GO
The flights
FlyDubai flies direct from Dubai to Skopje in five hours from Dh1,314 return including taxes. Hourly buses from Skopje to Ohrid take three hours.
The tours
English-speaking guided tours of Ohrid town and the surrounding area are organised by Cultura 365; these cost €90 (Dh386) for a one-day trip including driver and guide and €100 a day (Dh429) for two people.
The hotels
Villa St Sofija in the old town of Ohrid, twin room from $54 (Dh198) a night.
St Naum Monastery, on the lake 30km south of Ohrid town, has updated its pilgrims' quarters into a modern 3-star hotel, with rooms overlooking the monastery courtyard and lake. Double room from $60 (Dh 220) a night.
The biog
Job: Fitness entrepreneur, body-builder and trainer
Favourite superhero: Batman
Favourite quote: We must become the change we want to see, by Mahatma Gandhi.
Favourite car: Lamborghini
The White Lotus: Season three
Creator: Mike White
Starring: Walton Goggins, Jason Isaacs, Natasha Rothwell
Rating: 4.5/5
Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
More on Quran memorisation:
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
GOODBYE%20JULIA
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The Comeback: Elvis And The Story Of The 68 Special
Simon Goddard
Omnibus Press
If you go
The flights
Emirates and Etihad fly direct to Nairobi, with fares starting from Dh1,695. The resort can be reached from Nairobi via a 35-minute flight from Wilson Airport or Jomo Kenyatta International Airport, or by road, which takes at least three hours.
The rooms
Rooms at Fairmont Mount Kenya range from Dh1,870 per night for a deluxe room to Dh11,000 per night for the William Holden Cottage.
Correspondents
By Tim Murphy
(Grove Press)
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RESULT
Brazil 2 Croatia 0
Brazil: Neymar (69'), Firmino (90' 3)
UAE%20medallists%20at%20Asian%20Games%202023
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2019 ASIAN CUP FINAL
Japan v Qatar
Friday, 6pm
Zayed Sports City Stadium, Abu Dhabi
The biog
From: Ras Al Khaimah
Age: 50
Profession: Electronic engineer, worked with Etisalat for the past 20 years
Hobbies: 'Anything that involves exploration, hunting, fishing, mountaineering, the sea, hiking, scuba diving, and adventure sports'
Favourite quote: 'Life is so simple, enjoy it'
Mia Man’s tips for fermentation
- Start with a simple recipe such as yogurt or sauerkraut
- Keep your hands and kitchen tools clean. Sanitize knives, cutting boards, tongs and storage jars with boiling water before you start.
- Mold is bad: the colour pink is a sign of mold. If yogurt turns pink as it ferments, you need to discard it and start again. For kraut, if you remove the top leaves and see any sign of mold, you should discard the batch.
- Always use clean, closed, airtight lids and containers such as mason jars when fermenting yogurt and kraut. Keep the lid closed to prevent insects and contaminants from getting in.
The smuggler
Eldarir had arrived at JFK in January 2020 with three suitcases, containing goods he valued at $300, when he was directed to a search area.
Officers found 41 gold artefacts among the bags, including amulets from a funerary set which prepared the deceased for the afterlife.
Also found was a cartouche of a Ptolemaic king on a relief that was originally part of a royal building or temple.
The largest single group of items found in Eldarir’s cases were 400 shabtis, or figurines.
Khouli conviction
Khouli smuggled items into the US by making false declarations to customs about the country of origin and value of the items.
According to Immigration and Customs Enforcement, he provided “false provenances which stated that [two] Egyptian antiquities were part of a collection assembled by Khouli's father in Israel in the 1960s” when in fact “Khouli acquired the Egyptian antiquities from other dealers”.
He was sentenced to one year of probation, six months of home confinement and 200 hours of community service in 2012 after admitting buying and smuggling Egyptian antiquities, including coffins, funerary boats and limestone figures.
For sale
A number of other items said to come from the collection of Ezeldeen Taha Eldarir are currently or recently for sale.
Their provenance is described in near identical terms as the British Museum shabti: bought from Salahaddin Sirmali, "authenticated and appraised" by Hossen Rashed, then imported to the US in 1948.
- An Egyptian Mummy mask dating from 700BC-30BC, is on offer for £11,807 ($15,275) online by a seller in Mexico
- A coffin lid dating back to 664BC-332BC was offered for sale by a Colorado-based art dealer, with a starting price of $65,000
- A shabti that was on sale through a Chicago-based coin dealer, dating from 1567BC-1085BC, is up for $1,950
Specs
Engine: Dual-motor all-wheel-drive electric
Range: Up to 610km
Power: 905hp
Torque: 985Nm
Price: From Dh439,000
Available: Now
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
Our legal consultants
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
