Equity Sectors: Financials Remain ‘Cheap’, But Risky

• The surge in risk-aversion in recent weeks has led to a strong demand for ‘safe’ USD leaving EM equities vulnerable, which were trading at their lowest level since November 2020 this week.
• In this chart, we compute the z-score of P/B ratios of the 11 EM equity sectors (+ EM index - MXEF Index) using over 10 years of data (starting January 2010) and then rank them from 'cheapest' to 'most expensive' based on the distance between the minimum value and the current z-score.
• Real Estate and Consumer Discretionary remain the 'cheapest' sectors among the EM world:
  • The drop in EM real estate stocks was mainly driven by the collapse of China developer Evergrande last year.
  • Consumer Discretionary have been performing poorly in recent months as consumer confidence indicators continue to stand at 'depressed' levels due to Covid uncertainty and surging inflation.
• Financial equities, which had been mainly supported by the aggressive tightening cycle run by EM central banks to counter the inflationary pressures, have remained vulnerable in recent weeks as growth expectations are likely to be reviewed to the downside.
  • Financials equities are also ‘cheap’ using our P/B z-score approach.
• On the other hand, Telecom and Utilities are the most 'expensive' sectors (both ‘defensive’ sectors).

Source: Bloomberg/MNI