Analysis by Vladimir Oleinikov
Emerging market equities have fully recovered since the start of the conflict with Iran (28 February), rising by 5.3% in terms of total return. Earnings revisions (earnings per share) have improved despite geopolitical tensions, reflecting macroeconomic resilience and AI-driven results. Beyond AI, emerging markets are benefiting from broader industrial trends – renewable energy, energy security and defence – particularly in Asia (which accounts for 82% of the MSCI EM), which should drive industrial investment and, through growth in employment and wages, consumption. Valuations remain attractive: emerging market multiples trade at a discount to Europe and the US (7% to 20%). Specifically, the P/E ratio of emerging markets relative to the MSCI World is 1.4 standard deviations below its long-term average since 2001. If we adjust the P/E ratio based on expected long-term earnings per share growth (PEG = P/E / long-term earnings per share growth) and, furthermore, based on the COE/ROE ratio (cost of equity/return on equity), emerging markets remain attractive: the adjusted PEG for emerging markets stands at 0.9, compared with 1.3 for the US and 1.6 for Europe. In our country-based valuation approach, emerging markets, Asia-Pacific and the US rank fifth, twenty-ninth and forty-first, respectively.
Further geopolitical escalation could weigh on both emerging markets and the EU in the short term. That said, in a more favourable scenario, emerging markets should benefit from stronger earnings growth, significant undervaluation and a weaker dollar. Within emerging markets, we favour specific markets where particular drivers are present – valuation, exposure to AI or policy support – namely Brazil (which also benefits from oil), China/the Chinese technology sector, South Korea and Poland.
