The MSCI EM index has fallen -7.1% YTD, the 5th worst start to the year since 1988, extending last years underperformance vs DM equities. We continue to recommend an UW position on EM & APXJ vs DM equities, it said in a recent strategy note.
It cited two core structural problems with the emerging markets, along with political risk events faced by certain companies in the pack: transitioning growth models & slower GDP growth, and funding vulnerabilities & FX adjustment pressure due to a rising global cost of capital.
It also noted that while the consensus 2014 EPS estimates for EM have come down from $98 to $95 in the last eight weeks, at forward multiple of 10 times, valuations are not yet sufficiently attractive versus prior market troughs.
While the gap between the return on equity of MSCI EM and MSCI DM indices has shrunk significantly since 2009, the downward 2014 EPS revision for MSCI EM has exceeded that for MSCI world since mid-2013. For India, it allocated weights of 1.1%, 0.8% and 0.5% to software & services, banks and energy sectors. Auto, FMCG and Pharma were each assigned 0.3% weight.