Emerging markets are nowhere near as bad as many think
'Conventional wisdom among investors and analysts is that they [emerging markets] are historically cheap. For example, [this graph] shows that EM equity valuations according to price-to-books are near levels not seen since crisis periods such as the 2008/09 global financial crisis or the Asian crisis in the late 1990s.
'However, the prospects for EM equities may not be as challenging as they appear. While we do not see an immediate catalyst to unlock EM value, there are several positive developments that should underpin EM equities over the next quarter:
* 'In China, the government has adopted an easier stance (a weaker CNY, lower short end rates and renewed fiscal spending) and low inflation (currently 2%) should not be a constraint for further easing
* 'We expect growth to accelerate in H2 in the US and China, and the moderate recovery to continue in Europe, supporting EM via export demand
* 'The Crimea crisis is unlikely to have systemic repercussions. This is consistent with the views in our Global Macro Survey, where the majority of respondents believe it is likely to stop being a major market concern after a few weeks
* 'There is room for idiosyncratic/fundamental improvement: we are seeing better growth data and inflation falling in various EMs, notably in India.
* 'Even though we expect higher US yields by end 2014, we think a sharp move up, as in May 2013, is unlikely. Importantly, we have also pushed back the timing of any uptick in US inflation, which should leave US yields stable for longer.'