For the MSCI Emerging Markets Index, the valuation distortion is even deeper, given the higher volatility of EPS projections.
In 2008, analysts cut EPS estimates for the gauge by about 49%. The reductions during the 2011-2015 slump (spurred by the euro-area debt crisis, taper tantrum and China slowdown) were about 40%.
If the smaller reduction is applied to the present, the MSCI gauge may see estimates falling to 60.76 index points. Given its average valuation of 11.48 since 2005, this lower EPS represents an index price of 697 points.
That’s a 23% slump from current levels. Again, that may be considered the bottom for the market, according to this method.
If we apply the current price to the lowest possible valuation, the MSCI gauge has a hypothetical valuation of 14.9, a 37% premium to the current valuation.
That can be seen as the degree of risk in buying emerging-market shares right now.
This article was provided by Bloomberg News.