Correction puts Emerging Markets in Sweet Spot

"Over the last one month, the European crisis has resulted in increased risk aversion, impacting the global Equities. After the correction, valuations in the Emerging Markets have again become attractive, given their growth prospects. For instance, after the sharp sell-off that China witnessed over the last one month, the country’s valuation has become compelling. While a part of the same is on back of its high linkages to global economy, at 13.0x P/E and around 0.6x Market Cap/GDP, the valuations are attractive given that the growth in the region would still continue to be higher than the other economies. Thus, while the Equity markets have witnessed a downtrend on the back of fund outflows owing to increased risk aversion, we believe that the same is an aberration, as global liquidity is expected to remain robust on the back the low interest regime in the developed world, which would chase high growth destinations.

Moreover, the US $1trillion bailout package that was announced for troubled EU nations – like the US Fed’s bailout packages – is expected to resolve the crisis and restore confidence in the financial markets. To draw a parallel, the US bailout was an estimated US $1.5trillion for a US $14trillion economy, which tantamount to 11% of the GDP. In comparison, the US $1trillion European package (for four the economies of Portugal, Italy, Greece and Spain - PIGS) works out to around 24% of GDP (with the combined GDP of PIGS countries being around US $4.2trillion). 

Here-on, we believe that the downsides are limited and expect the funds to flows towards high growth Emerging Markets like China. India, being the next high-growth economy and more resilient to the vagaries of the global developments would also benefit from the same."

Report from Angel Securities - Market Strategy June 2010