Emerging Markets

Pimco advisor Research Affiliates calls emerging markets 'trade of a decade'

Currency exchange rates in central Moscow, Russia.
Maxim Zmeyev | Reuters

Battered emerging markets (EMs) are the trade of a decade for long-term investors, according to an adviser to Pimco, one of the world's leading bond funds.

In a Thursday note on Pimco's website, Christopher Brightman, chief investment officer at Research Affiliates, said that EM stocks and bonds appeared cheap relative to historic price action as well as alternatives.

"The exodus from emerging markets (EMs) is a wonderful opportunity—and quite possibly the trade of a decade—for the long-term investor."

Research Affiliates has been a subadviser to Pimco for over a decade. Both investment businesses are based in Newport, California.

EMs have borne the brunt of the recent market turmoil, with the MSCI Emerging Markets Index down more than 7 percent year-to-date, amid slowing growth in China, the renminbi's depreciation, sinking commodity prices, Middle East tensions, and recessions in both Brazil and Russia.

Why China markets are a bit better: CLSA
Why China markets are a bit better: CLSA

While Brightman acknowledged that the current fear of EM assets was pervasive and understandable, he said those ignoring the asset class were making a major mistake.

"Offering high yields, favorable demographic trends, strong productivity growth prospects, and a long-term trend of improving credit quality, emerging market asset classes are secularly attractive," he said.

His bullish views are reflected in Research Affiliates' positioning in EM stocks and bonds, which represented an allocation of more than 30 percent in two of the firm's funds in 2015.

Compelling valuations makes EMs even more attractive, Brightman said.

Are EM equities set for a bounce?

Using the Shiller price-to-earnings (P/E) metric, which divides real prices by the ten-year average of real earnings per share, EM equities were priced at a P/E multiple of 10 times in January, the lowest fourth percentile since 1990, he explained.

On a historical basis, stocks in both developed and EM countries tend to deliver hefty returns after reaching these bargain-basement multiples, he said.

"Once Shiller P/E falls below 10x, the average cumulative five-year return is an impressive 118 percent!"

So in short, while the bear market in EMs has been painful, today's opportunistic investor should pounce on their potential returns, he noted.

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