Equity markets around the globe have had a rough year owing to the Russian invasion of Ukraine, a resurgence of Covid-19 in clusters and a strong dollar. While this puts pressure on emerging market equities, Putnam Investments believes that the asset class has been wrongly classified as high beta and too volatile.

The investment management firm sees emerging market equities outperforming in the second half of 2022 and next year, thanks to attractive valuations and diverging central bank policies. The MSCI Emerging Markets Index has seen higher profit margins and returns on equity over the past decade as Asia now dominates the index. Additionally, the index now has lower exposure to commodity-based markets.

Brian Freiwald, Portfolio Manager at Putnam, writes that price-to-earnings ratios in emerging markets have collapsed to trough levels of just 10.5x, while the risk-to-reward profile for EM equities is the most attractive after the pandemic set in. “Unlike the U.S., several EM countries are benefiting from rising commodity prices and are witnessing much lower inflation. In the current environment, we believe Saudi Arabia and Indonesia are two potential winners,” writes Freiwald.

The asset manager says that Saudi Arabia now has more opportunities than just oil, specifically in the consumer, financial and healthcare sectors. On the other hand, Indonesia is expected to be among the fastest growing economies over the next two years and a swelling population will drive consumption growth.

“Today we are finding opportunities to own attractively valued high-quality businesses that, in our view, are effectively navigating macroeconomic headwinds and are positioned to double or triple — or more — in size over the next decade,” says Freiwald.

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