That’s according to the market minds at Goldman Sachs, who identified EM equities as one of their top investment picks for 2018. Here’s the details from their annual list of the firm’s top trade recommendations:
From a valuation perspective, EM equities are not cheap relative to their own history (they are currently trading in the 86th percentile of the historical P/E range), but they are cheap relative to US equities (38th percentile of historical relative P/E range), which should hopefully offer some cushion in a global risk-off event. We find that the relative valuation of EM to DM equity is largely influenced by the growth differential between the two regions; and we forecast this differential to widen another 60bp next year, which in turn should drive EM valuations to expand relative to DM by around 3%. To be sure, a long-only EM equity trade carries significant ‘pullback risk’, especially given the current entry point. Accordingly, we have set a stop on the recommended trade at -8%, which provides enough buffer to accommodate for a shock similar to the EM equity sell-off around the US election. Although EM equities have had a good run in 2017, we do not view the asset class as over-owned. Indeed, the cumulative foreign flow into major EM equity markets is still tracking below historical averages.
The iShares MSCI Emerging Markets Index ETF (EEM) was trading at $46.77 per share on Friday morning, up $0.18 (+0.39%). Year-to-date, EEM has gained 34.21%, versus a 16.57% rise in the benchmark S&P 500 index during the same period.