2018 was a tough year for global equities. The Morgan Stanley Capital International (MSCI) World Index recorded a -10.4% downturn in 2018 after reaching a five year high in Jan-18 as concerns over global growth, trade tensions, and other geopolitics, coupled with Fed rate hikes, stoked risk-off sentiments.
This was tougher for Emerging and Frontier Markets as the MSCI Emerging Market (EM) Index tumbled -16.6% while the MSCI Frontier Market (FM) Index faltered -19.1% amid risk-off sentiments and broad currency weakening. In retrospect, we highlight that the broad-based EM assets decline experienced in 2018 might have been overdone, considering that the long-term fundamental story remains intact.
Heading into 2019, valuation appears increasingly attractive when compared to historical trends. Specifically, the current P/E ratio of the MSCI EM Index sits below a 20-year long-term average. Beyond valuations, the underlying potential of EM economies underscores a fundamental backdrop. Data from the IMF suggests that EM’s share of world GDP (based on PPP) rose from 43.2% in 2000 to 59.2% in 2018; with forecasts showing it would rise even further to 62.7% by 2023.
Meanwhile, MSCI suggests that the share of its EM index is c.10% of world market capitalization, underscoring a misalignment between underlying economic
fundamentals and financial markets. Yet, we acknowledge that headwinds still exist (ranging from ripples of US-China trade tensions to further tightening of financial conditions) and could imply volatility.
UNITED CAPITAL RESEARCH