High GDP = High Equity Returns
A reminder of EM outperformance trend
Emerging Market Equity Strategy


See page 11 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
Confidence in EM equities is low. This is understandable with the asset
class underperforming DM equities by 13% in 2011. This report reviews
the performance from the end of 2002 recession to end 2011. During this
period EM outperformed DM by 10%pa. The US dollar CAGR total
return for MSCI EM and MSCI World were 17% and 7% respectively
(see Table 1).
Did high economic growth result in high EM EPS growth and returns?
Yes. EM EPS and nominal GDP CAGR over the period were 13%. The
consistency of EM EPS growth was higher than DM (see page 6). But
the beta of EM EPS to economic growth at 0.9 is poor relative DM's 2.6.
J.P. Morgan's economist forecast that potential nominal EM GDP is four
times DM. Even with EMs’ low EPS beta to GDP this still supports EM
outperformance in the future.
PE re-rating, currency appreciation and dividends contributed just 1%,
1% and 3% respectively to annual returns. For dispersion in rerating and
currency appreciation at a market level see table 2. See page 7 for the rerating
drivers. See page 9 for comparison of dividend growth vs EPS
growth.
We analyze the percentage of times a market outperformed EM on a
three month rolling basis (see Table 2) and duration of outperformance
(see Table 3). Indonesia outperformed EM maximum number of times
and China had the longest continuous outperformance rally.
For more on our strategy, please see Emerging Equity Markets