EM equity valuations still look favourable

The strong performance of emerging market equities over the past month has driven the price/12m forward earnings ratio further above its five-year average. In fact, on this measure, equity valuations in Latin America now look almost as stretched as those in developed markets.

But we still think that equities in emerging markets will continue to outperform those in developed markets over the next few years. On average, their valuations are still more favourable. And we are fairly sanguine about the risks from slower economic growth and tighter monetary policy in the US, given that most of the slowdown in emerging markets has probably already happened and emerging market equities performed well during the past two periods of US monetary tightening.