Analysts at Bank of America Merrill Lynch reversed their five-year bearish call on emerging markets to a long-term bullish view, predicting that the chumps of yesteryear will the the champions of tomorrow.
“We are at an inflection point that is likely to challenge the winners of the past five years and boost the losers,” Ajay Singh Kapur, an equity strategist at Bank of America Merrill Lynch, said in a Tuesday note.
“Emerging market” is a generic term applied to a developing economy that has the characteristics of a developed market but doesn’t meet all the internationally accepted standards for an advanced economy. It covers a diverse group of countries from China to Oman and is home to about 80% of world’s population. Emerging markets collectively account for roughly 45% of the global economy.
The analysts cited several reasons for the more bullish on emerging markets outlook, including cheap valuation, foreign exchange competitiveness, an expected recovery in earnings, and loose monetary policy in China.
Here are a few of the more compelling points:
Emerging market’s price-to-sales ratio is in the 19th cheapest percentile since 1995.
Weaker currencies make their assets cheaper and make their exports more desirable. Conversely, a strong dollar has historically contributed to widening the U.S.’s current-account deficit (see chart) and likely provide more dollars to emerging markets.
“The miserable run of Asian and EMs earnings per share growth [and] revisions is likely ending,” said Kapur. A combination of weak currencies, lower commodities prices, and subdued capital investment are likely to lead to better earnings among EM countries.
China’s easy monetary policy is working exactly as it should by boosting property prices.
BofA’s analysts hedged their call by noting that his rosy scenario may not pan out if the U.S. dollar continues to strengthen, Beijing dials back its loose monetary policy or there is a global recession. But aside from these unknowns, analysts urged investors to give emerging markets another look.
“The time for elegant skepticism and bearishness is over—we have been there for five years now. The time to get out of the bunker and off the fence has arrived,” Mr. Kapur said.
To this point, eight of the 10 best performing stock markets in 2016 are considered emerging markets, and all of them have outperformed the S&P 500’s SPX, +0.31% 2.7% rise, according to FundStrat.