MRB's Chart of the Week: time to take EM risk

MRB has just recommended that clients should overweight emerging market (EM) equities and currencies.

There will still be further market turbulence until the US fiscal cliff is dealt with and Spain finally applies for a bailout. However, the surprise for 2013 looks like a revival in Chinese and global economic growth. The hunt for yield is fully exploited, and the next phase is likely to be the search for growth – investors should start nibbling as prices finish correcting.

There have been two bear markets in EM stocks in the past 10 years, in absolute terms and relative to global benchmarks. The first occurred when the global economy imploded in 2008.  The second was a more muted, but prolonged, affair over the past two years. Initially caused by policy tightening in many EM countries, it persisted as Europe slid into recession and global growth struggled.

The chart shows EM stocks are now reviving in relative terms, aided by policy easing in the developing world. This should continue for several reasons: 

EM equities offer the best leverage to an improvement in global growth. To this end, there are already signs the Chinese economy is reviving.

Value is relatively attractive in the EM. All equity markets are cheap compared with bonds and cash, but many EM bourses are good value relative to major developed markets.

Investors are very pessimistic towards these shares. This is positive from a contrary perspective: buy when everyone else has already sold.