Emerging market stocks now at cheapest this year

The recent sell-off in global markets has pushed valuations for emerging market stocks to their cheapest level this year, according to Citi.

The price-to-earnings (P/E) ratio of the MSCI Emerging Markets Index is currently below 10 - levels not seen since November 2012 - and Citi recommends investors regain exposure to these stocks now instead of waiting for a catalyst to drive a turnaround. "We think the situation has to get really dire in EM [emerging markets] to justify equities at these multiples. We do not expect that to happen. Of course EM economies have their problems but it seems that share prices are already discounting something much worse," strategists at the bank wrote in a note published late Tuesday. Emerging markets have been hammered in the recent weeks on fears over the US Federal Reserve scaling back on its extraordinary monetary support, leading to a widespread sell-off in bonds, currencies and equities. The MSCI Emerging Markets Index has declined 11 percent since early May. Historically, buying into emerging markets at current cheap levels has provided solid returns over a 12-month horizon, the bank added. Developed equity markets including the US and Japan have not offered buying opportunities at sub-10 times price-to-earnings since 2000, not even during the global financial crisis, according to Citi. While many investors fear that emerging market equities are a value trap given worsening economic fundamentals including slowing growth and widening current account deficits, Markus Rosgen, head of Asia-Pacific equity strategy at Citi believes these concerns are overdone. "While it is true that global emerging markets` growth is lower than it used to be, the base of growth is higher and the premium against developed markets remains substantial," he said. "Less uncertainty about global growth and investors will swing towards more cyclical assets like EM equities," Rosgen added. He noted that emerging markets have room to provide monetary stimulus if needed, given that interest rates in developing economies are not near zero. "The fiscal position still looks strong enough to allow further stimulus if needed. EM finance ministers still have more options than their DM [developed market] counterparts," he added. Finally, he argued that with sentiment towards the asset class so negative, it would take "less bad data" to regain momentum in emerging markets. Addressing concerns over how a continued sell-off in emerging market government bonds - which has contributed to a depreciation in their currencies - will impact equities, Rosgen said, "While we recognize that EM equities may be vulnerable to an exodus from more fashionable EM bonds, lowly valuations should help to limit the downside." Copyright 2011 cnbc.com