Many investors have been looking for alternatives to emerging markets after a period of poor returns has caused the MSCI Emerging Markets index to lose money year-to-date.
However, Iwanicki (pictured) says that while some parts of the market are best avoided, the sector is now at an attractive long-term entry point.
"Very unfavourable news-flow, both internally and externally, means that valuations have gone down to a level that is historically more of a buying opportunity than a selling opportunity," he said. Iwanicki says the fall in valuations is a recent development, as 12 months ago emerging market stocks were still at "accumulate" levels – around their natural historic level to global equities.
"The underperformance of emerging markets has opened up some of the valuation gaps with developed markets, particularly with the US," he said.
"Most margins of valuation are generally under their historic levels, so the beginnings of undervaluation discounts."
Data from FE Analytics shows that the MSCI Emerging Markets index has lost 2.36 per cent in the year-to-date.
Performance of indices in 2013
Source: FE Analytics
MSCI Russia is down 1.36 per cent and MSCI China 2.65 per cent, which Iwanicki says makes these two markets look particularly cheap.
"At the country level we find it difficult to find combinations of value and momentum. China and Russia look cheap, and the BRICs generally, but we are leaning against some of those richer defensive markets like ASEAN and Mexico."
The FTSE ASEAN index has made 9.66 per cent in the year-to-date, while the FTSE Mexico benchmark has put on 1 per cent.
Both areas have become increasingly popular with fund managers, judging by recent interviews with FE Trustnet.
Iwanicki says that he thinks valuations are now stretched, however, and that he prefers the cheaper BRICs.
Writing about the JPM Global Emerging Markets Income trust, Monica Tepes, senior fund analyst at Cantor Fitzgerald, agrees that emerging markets are looking cheap on technical metrics.
She points out that periods of poor earnings, as experienced by emerging market stocks over the past couple of years, are historically followed by positive surprises.
The price-to-book ratio on the market is at crisis levels of 1.5x, she explains, which tends to correspond to high forward one-year returns.
JPM Global Emerging Markets Income has made 34.81 per cent over the past three years, benefiting from its position in in-favour dividend-paying stocks, while the broader index has made just 5.51 per cent.
Performance of trust vs index and sector over 3yrs
Source: FE Analytics
Iwanicki says that he favours cyclicals in the current environment, however.
"In terms of the business-cycle signals being relatively neutral, we’re tilted a bit cyclically but with the express exception of materials. We think these are disfavoured not only by the growth rotation in China but also by the continued rally in the dollar, which basically means in our view, the likelihood of continued underperformance."
Paul O’Connor, member of the multi-asset team at Henderson, says that he is unconvinced this is really a buying window and that investors should wait for a better opportunity.
"The retrenchment of foreign capital from some emerging markets and policy actions in others are tightening credit conditions at a time when growth is already weakening," he said.
"The key risk is that macro fundamentals deteriorate further, leaving the asset class vulnerable to any adverse economic shocks."
"With the Chinese authorities looking unlikely to stimulate growth in the near-term, these concerns will be difficult to dispel and are likely to overshadow emerging market stocks for some time to come."
Both O’Connor and Iwanicki agree that Chinese growth is likely to continue to disappoint, but the JP Morgan strategist is unconcerned by the possibility of a credit breakdown.
"We do not think the credit cycle breakdowns will be the next shoe to drop in EM," he said. "It’s sufficiently contained that it doesn’t look like an impending bust in the making."
