China Sell Off Makes Emerging Markets Better Value

China shares have had their worst October in a decade, and the sell-off yesterday was the largest since January 2016 - is the fear warranted?

Cyrique Bourbon 9 October, 2018 | 9:34AM
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Cyrique Bourbon: Markets continue to be quite volatile and there's plenty for investors to be worried about thinking about the trade war between the U.S. and China where there are actually risks that things could escalate a little bit further. Obviously, markets have reacted to that to a certain extent pricing in some of those risks and we feel they are probably the most priced in on the emerging markets side.

So, one of the worst performing market this year has been China. Chinese equities, both the local markets and the offshore markets, is down between 10%, 15%, 20% this year, especially from the early February peaks.

So, what we are finding generally is more value emerging there as valuations have become more attractive. There's some pressure on the fundamentals which has yet to come through the numbers as we are seeing more weakness coming for the Chinese economy which has been well publicised, hence why the markets have been weaker.

So, in general, finding more value in emerging markets whilst on the other hand U.S. equities, which have been a standout performer this year driven mainly by tech on, what we call, profit margins are definitely a lot more stretched when we look at their valuations. U.S. more expensive, emerging markets cheaper. But with emerging markets selectiveness is important. So, China is, for instance, a lot cheaper, about 13 times earnings. But if you look at India, you're still finding stretched valuations on about 20, 22 times earnings with high growth expectations for India. So, important to be selective within emerging markets.

Simple message, yes, there's volatility, there has been for many years in emerging markets. But relative to other parts of the world, emerging market equities are more attractive in our view at this point in time.

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Cyrique Bourbon  is multi-asset portfolio manager for Morningstar Investment Management EMEA