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EM Growth?
CAPE ratios are lower outside the U.S., with emerging markets even lower than those in developed markets. While we have been more constructive in recent issues of Global Foresight on non-U.S. opportunities, we believe there is limited relevance of CAPE ratios when comparing the very deep, diverse set of companies in the U.S. with most other markets. While valuation from 30,000 feet looks better in many places, there are reasons to discount CAPE as a reliable valuation tool when analyzing smaller markets. As an extreme example, Russia has the lowest CAPE ratio in the world, but its equity market is very concentrated in commodity businesses whose earnings are highly cyclical.

TABLE 1 highlights data from the 10 largest emerging markets, which account for 89.2% of the MSCI Emerging Markets Index. The growth prospects of this group appear surprisingly tepid. The median real GDP growth for the next five years is forecasted at 2.5%, while population growth is expected to be less than 1.0%. The term "emerging markets" was coined in the 1980s, but frankly, most of these economies have already "emerged." The countries with the most long-term economic growth potential are arguably those with young, growing populations—namely, India, Indonesia and Malaysia. However, these countries have small equity markets that, when combined, do not even equal South Korea's in size.

TABLE 1: KEY DATA FROM THE TEN LARGEST EMERGING MARKETS

[Table Headers]
COUNTRY | INDEX WEIGHT | LAST 5 YEAR GDP GROWTH | FORECAST NEXT 5 YEARS GDP GROWTH | ESTIMATED POPULATION GROWTH TO 2021 | INFLATION RATE | MEDIAN POPULATION AGE | FISCAL DEBT/GDP | LEADING MARKET P/E | 10-YEAR BOND YIELD | SOVEREIGN DEBT RATING

[Table Rows]
CHINA | 27.7% | 7.3% | 6.4% | 0.6% | 2.0% | 37.1 | 46.2% | 13.6 | 3.5% | AA-
SOUTH KOREA | 15.4% | 2.8% | 2.7% | 0.4% | 1.3% | 41.2 | 38.6% | 9.7 | 2.2% | AA
TAIWAN | 12.2% | 2.1% | 2.2% | 0.2% | 1.4% | 40.2 | 35.7% | 13.8 | 1.0% | AA
INDIA | 8.8% | 6.3% | 7.5% | 1.3% | 5.0% | 27.6 | 69.5% | 18.8 | 6.5% | BBB
SOUTH AFRICA | 7.0% | 1.6% | 1.5% | 1.6% | 6.3% | 26.8 | 50.5% | 15.9 | 8.4% | BBB-
BRAZIL | 6.7% | -0.4% | 1.8% | 0.7% | 8.8% | 31.6 | 78.3% | 12.0 | 10.7% | BB
MEXICO | 3.7% | 2.5% | 2.4% | 0.9% | 2.8% | 28.0 | 58.1% | 18.7 | 7.1% | A
RUSSIA | 3.3% | 0.5% | 1.5% | -0.1% | 7.1% | 39.3 | 17.0% | 5.8 | 7.6% | BBB-
INDONESIA | 2.5% | 5.6% | 5.3% | 1.3% | 3.5% | 29.9 | 27.9% | 15.7 | 6.8% | BBB-
MALAYSIA | 2.4% | 5.1% | 4.6% | 1.7% | 2.1% | 28.2 | 56.3% | 17.9 | 3.8% | A

SOURCE | MSCI *AS OF MAY 31, 2017 | BLOOMBERG | BLOOMBERG | IMF/BLOOMBERG | BLOOMBERG | CIA WORLD FACTBOOK | IMF | MSCI/BLOOMBERG | BLOOMBERG | S&P

TOTAL | 89.7%
MEDIAN | | 2.7% | 2.5% | 0.8% | 3.2% | 30.8 | 48.4% | 14.8 | 6.7%
AVERAGE | | 3.3% | 3.6% | 0.9% | 4.0% | 33.0 | 47.8% | 14.2 | 5.8%

Sources: Bloomberg, IMF, CIA World Factbook, MSCI, S&P

China is a market that has looked attractively valued at times relative to its growth prospects. However, China has already had a spectacular recovery from a correction that rattled markets globally in August 2015 and again in January 2016. China is the largest emerging market and a vital trading partner for many other key emerging markets, such as Brazil. While China remains an important source of long-term global economic growth, it faces some cyclical and structural challenges that Jimmy Chang discusses in his article.

South Korea is an emerging market that has screened well for valuation and poorly for governance. As the second largest emerging market after China, we believe that South Korea is an important economy and source for potential investments. We cover it in more detail in the articles from Michael Seo and Dr. Mariela Vargova.

Aging Populations
A major challenge South Korea and China already face, is an aging population. Countries that are major economic powers are aging rapidly, while most of the youth in the world is concentrated in the poorest nations. One useful country demographic is the median age of its citizens. The U.S., with a median age of 37.9 years (half of all Americans are 38 or older), ranks 62 out of 230 nations, making it one of the older nations in the world, though one of the world's younger developed markets. Aging in the U.S. is dwarfed by comparison to most of Europe and Japan. Japan and Germany have median population ages of 46.9 and 46.8, respectively. Remarkably, if people in the U.S. ceased having kids for the next nine years, only then would we have a median population age approaching those today in Japan and Germany. Europe has a median age of 42.7 as a region and is nearly five years older than the U.S.

GLOBAL FORESIGHT THIRD QUARTER 2017 3
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