Strategy Note /

China and EM Tech valuation discount vs DM narrows ytd; not so for small EM-FM

  • EM (ex-India) and FM indices have been valued at a discount to DM, on forward price/book, for most of the post-GFC era

  • Year to date, China and EM Tech discount has narrowed while India premium shrunk, and FM and GCC discount has widened

  • Potential explanations: shift to the more liquid EM (understandable), confidence in China Covid-19 resilience (less so)

Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
1 April 2020
Published byTellimer Research

While we have argued that within EM public equities there is no island of insulation from the collection of risk factors (coronavirus war, oil war, trade war, capital outflow), and we stand by this argument, we make two observations:

(1) China and EM Tech forward PB and PE valuation multiples have improved substantially compared to Developed Markets (DM); and

(2) India and Frontier markets (FM), both the GCC and non-GCC parts, have deteriorated substantially, in valuation terms, compared to DM (as well as compared to China and EM Tech).

Either this could be explained by the confidence in China's ability to cope with Covid-19 and trade wars, and the durable structural growth, relative to all else, in technology. (We think confidence in the resilience of China in the midst of Covid-19 may be overdone). 

Separately, the current crisis has likely accelerated the shift within EM portfolios back to the most liquidly traded parts of the addressable universe: 

  • Traded value over the last month in MSCI China and Hong Kong equates to over 70% of MSCI EM (over the last 5 years this figure is 55%); and
  • Traded value in MSCI EM Technology equates to closer to 25% of MSCI EM (over the last 5 years this figure is just under 20%).

This sort of move would hurt, in relative terms, all of the rest of EM (and, by implication, FM).

Valuation multiples in EM and FM since the Global Financial Crisis