Finding Value In EM Markets: Financials Relative P/B Ratios

• EM Financials have been gradually recovering since their low reached in March 2020, up 5.6% YtD (vs. -11.3% in 2020) and up over 50% in the past 14 months. They are still standing 7% below their January 2020 high, and 20% below their January 2018 highs, which was then liquidity reached its peak in the EM markets.
• Poland experienced the biggest turnaround within the EM markets, with financials up 23% YtD following a 28% drop in 2020, quickly followed by Saudi Arabia and South Africa.
• From a value perspectives, EM financials are still 'cheap' relative to EM equities, trading at a 45% discount relative to the EM MSCI Index looking at the relative Price-to-Book ratios (1.1 P/B for financials vs. 2.1 for MSCI EM Index).
• The chart below (source: Bloomberg) shows the relative price-to-book valuation for EM economies (relative to the MSCI EM Financials Index - MXEF0FN Index).
• Interestingly, Poland, South Africa and Czech Republic are still cheap using this 'fair' value metrics despite the strong recovery in the past year, trading at 1 standard deviation below the 5-year average.
• Surprisingly, Russia financials are the most expensive, with the relative P/B ratio trading close to 3-std deviations above the 5-year average.

Source: Bloomberg