Human psychology plays a key role in impacting stock and bond price movements. Based on this tenet of Behavioural Economics, Ashmore Group describes the current market phase as a period of ‘irrational exuberance’ because several long-term investors still give undue importance to US equities. The asset manager urges investors to rethink and consider undervalued equity markets with visible upsides and suggests that Emerging Markets (EM) fit the bill perfectly. 

Gustavo Medeiros, Head of Research at Ashmore is concerned over the rising demand for short-term debt. He says, “Low earnings premium explains the allure of T-Bills. An asset with ‘volatility-free’ cash returns superior to the stock market ought to be a large part of investors’ books, particularly long-term investors who can afford to sit-out of an irrational market for longer. However, this approach carries risks.” He further talks about how the investors buying US bonds as ‘risk-free’ are ignorant of the two major risks namely large fiscal deficit and dollar depreciation.

Medeiros elucidates that the previous notion of ‘There Is No Alternative’ (TINA) to the US stock market, doesn’t hold true anymore. He contends that “long-term investors need long-term return sources.”

The asset manager declares that the Emerging Market is the obvious alternative to the US equities. “Monetary policy easing will either make the EM earnings yield significantly more attractive or drive a re-rating of EM stocks to higher valuations, or perhaps, both.” Ashmore adds, “In fact, the combination of a weaker USD and lower interest rate in local currency bonds will very likely boost GDP growth across EM countries.” 

On valuation, Dhiren Shah, Fund Manager at Ashmore says, “The P/E ratio of the MSCI EM is very attractive against not only US stocks but also against the MSCI World, which includes all DM countries”.  He explains that the “Magnificent Seven” or the mega-caps may continue its mega rally, but they continue to be expensive. Hence, mega-cap stocks in Emerging Markets offer better value across themes, as per the fund manager.

Talking about the downside, Ashmore states that China’s share in EM stocks has discouraged some investors from the asset class. It is also the reason behind some of the recent underperformance of Emerging Market stocks. However, the asset manager believes that Beijing is aware of the risks of a global economic slowdown and aims to prevent the Chinese economy run into a ‘balance sheet’ recession. “Risks to Chinese stocks are well known and fully priced in our view. Low valuations mean investors give no benefit of the doubt, despite China’s strengths and any potential improvement on its business environment,” contends Ashmore.

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