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Signs Point to Upside in EM Equities

Brian Levitt, OppenheimerFunds Senior Economist, shares his recent thoughts on emerging market equities below. — Kathleen

After declining for much of the year on concerns over slower global growth, emerging market (EM) equities have staged a relief rally in recent weeks. While the initial move up may have been a bounce from an oversold position, there are signs that support the case for further gains in the asset class. As you can see on the chart provided below, when global purchasing managers’ indices (PMI) are growing in aggregate and the 10-year U.S. Treasury yields are rising — market conditions which exist today — the MSCI Emerging Markets Index has historically outperformed the MSCI World Index by 11.4%. While past performance is no guarantee of future results, this relationship makes intuitive sense as both rising PMIs and treasury yields are reflective of improving nominal growth. Furthermore, after months of underperformance, emerging market equities appear to be attractively valued relative to history and its developed-market counterpart. The price-to-earnings (P/E) ratio of the MSCI Emerging Markets Index is 11.8x (vs. the long-term average of 15.5x), while the P/Es of the MSCI World Index is 16.3x. (Source: FactSet, 8/31/13. Price-to-earnings ratio is a valuation ratio of a company’s current share price compared to its actual per-share earnings over the last 12 months. Index definitions can be found below. Past performance does not guarantee future results.)
The MSCI Emerging Markets Index is designed to measure global emerging market equity performance.
The MSCI World Index is designed to measure global developed market equity performance.
The 10-Year U.S. Treasury yield is generally considered to be a barometer for long-term interest rates.
Each index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.
Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and geopolitical risks. Investments in emerging and developing markets may be especially volatile.
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RPL0000.184.0913 September 30, 2013