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Emerging markets stocks are not broadly attractive in terms of valuations levels despite the 11.5 per cent year to date drubbing in the MSCI Emerging Markets Index. One region however – the Emerging Europe, Middle East and Africa – does appear poised for a significant bounce.
The MSCI Emerging Markets index aggregates stock performance for the entire developing world including Asia, Latin America, Africa and Eastern Europe. Weakness in all of these markets during 2013 has made the sector slightly more attractive in valuation terms. But the current price to book level of 1.44 times is only marginally below the long term average of 1.5 times.
Buried within those aggregate numbers is a compelling buying opportunity in the Eastern Europe, Middle East and Africa region as measured by the MSCI EMEA Index. The index consists of eight countries; Czech Republic, Hungary, Poland, Russia, Turkey, Egypt, Morocco, and South Africa.
The chart shows that average price to book values have returned to levels around 1.15 times, where stocks began significant rallies in the past. Since 1998, the MSCI EMEA price to book value reading has hit 1.15 or below fourteen times. The average return in the subsequent twelve months was 41 per cent.
There is the small matter of World War Three potentially beginning in Syria, of course. Bank of America quantitative strategist Savita Subramanian notes, however, that where Syria is concerned, "we would expect any oil-related pullback in stocks to reverse as the market gains confidence that the U.S. will likely seek to avoid a protracted conflict in the Middle East."
Investment in the EMEA region does have risks even without the near term possibility of armed conflict – any index encompassing the Egyptian stock market certainly would – but compelling valuation levels do not usually occur where everything's running smoothly. There does appear to be opportunity for risk-tolerant investors here. I'd recommend diversified exposure through an ETF like the iShares MSCI Emerging Markets EMEA Index Fund for a small percentage of investor portfolios.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.