Investor sentiment remains cautious, with the discount of emerging market stocks to US stocks reaching the highest level in over 3 years

According to the latest information from Zhitong Finance and Economics APP, currently, as anxious investors are seeking other growth opportunities, the discount of emerging market stocks relative to US stocks is at its highest level since March 2020. Analysts have raised the average return expectations of the MSCI Emerging Markets Index by 5.2% in the past two months, higher than the S&P 500 Index's 1.9%. However, investor sentiment remains cautious, leading to underperformance of emerging market stocks compared to US stocks.

Nenad Dinic, a stock strategist at Credit Suisse in Zurich, Switzerland, stated: "Despite the improvement in earnings expectations, the current lower valuation of emerging markets relative to the S&P 500 Index reflects investor hesitation." "This cautious sentiment is related to the ongoing debate about US economic growth, as well as the potential impact of a potential victory by Republican candidate Trump - which could bring high tariffs and severely affect the sentiment in emerging markets."

Data shows that the price-to-earnings ratio of emerging market stock indices is 11.9 times, while the S&P 500 Index's price-to-earnings ratio is 21.5 times. The discount of emerging market stocks relative to US stocks has reached 45%, higher than the 28% over three years ago, due to the strong US dollar, persistent high inflation, and high interest rates negatively impacting emerging market growth and corporate performance. In addition, although the MSCI Emerging Markets Index has risen by nearly 8% since the beginning of this year, it may still underperform US stock indices for the seventh consecutive year.

Ygal Sebban, Investment Director at GAM UK Ltd., said: "Emerging markets are very cheap, despite being unpopular and not favored." He added that global economic growth will be the key for emerging market stocks to outperform the broader market. He said: "We need a soft landing for the US economy to prompt the Fed to cut rates (which will benefit emerging market rates and currencies). We also need some certainty on US tariffs."

Fund managers point out the need for a continued weakening US dollar, as well as more emerging market companies that can excite investors and be compared to the so-called "Big Seven" in the US. Mark Matthews, Head of Asia Research at Credit Suisse in Singapore, said: "The core issue for emerging markets has long been that they have very few innovative companies." "Since around 2010, investors have been focusing on innovation, so emerging markets have generally lagged behind." As for analysts, they are raising their profit forecasts for emerging market companies as people increasingly expect the Fed's loose policy to support interest rate cuts in emerging markets. Analysts' general profit expectations for tech companies are close to historical highs. Similar to the United States, the excitement around artificial intelligence has supported the rise of emerging market stocks this year. However, some are concerned that the industry's expected financial performance may not materialize quickly. Investors are awaiting the latest earnings report from the highly anticipated NVIDIA (NVDA.US) next week to assess whether the industry's uptrend can continue.