Bargains? Some emerging market stocks priced like they are going bust
As funds continue to flee emerging markets (EM), valuations in this asset class are becoming dirt cheap with large cap stocks priced as if they're "going out of business," Citi has said in a new report.
The bank says it sees "plenty" of value in the sector, especially in large cap equities which haven't been this cheap since the Asian financial crisis.
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"Large caps in growth emerging markets have de-rated to the extent that their relative valuations are back to levels last seen in 1997; in the case of Asia, the de-rating is down to levels not seen since our data series began in 1995," Citi said in a note on Monday.
Emerging market large cap stocks are also trading at a 25 percent discount to large caps listed on the MSCI Developed Markets Index, with the discount only having been wider during "crisis periods," Citi added.
These stocks have become the most "disliked asset class" within emerging market equities, but this could change as investors fear about "missing out" on opportunities.
"What is interesting for those who like price to book value versus return on equity (ROE) scatter plots is that ROE among large caps is still some 80 percent higher than for small and mid-caps," Citi said. "In other words, large caps have delivered ROE, but investors are refusing to pay for it."
Citi expects earnings to improve, as consensus estimates "can hardly get more awful." It notes, however, that investors need to get comfortable with energy, technology and banking sectors, which make of more than half of the large cap space.
"Investors have to believe that global demand is improving rather than deteriorating, which would help sentiment towards energy and tech in particular," it said.
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Flows out of emerging market equities continued last week with the exit of $761 million in the week ending August 14, according to Citi. China saw the largest outflows within Asia at $241 million - marking the 13th week of outflows.
Citi said investor sentiment could get a lift by "continued improvements in PMIs (purchasing managers' indexes)" across emerging markets, and "a better credit environment in China."
— By CNBC.com's Rajeshni Naidu-Ghelani. Follow her on Twitter @RajeshniNaidu