Are Chinese and other companies in emerging markets finally getting the respect they deserve? Historically, they’ve traded at a discount on all metrics of valuation—typically, in the range of 20 to 30 percent.¹ Even as the underlying Chinese economy developed and the shares of these companies became a commonly accepted investment option, neither institutional nor retail investors quite shook the perception that such securities were generally risky. Yet if the Asian financial crisis of the late 1990s reinforced that belief, the credit crisis of 2007 may have reversed it. Indeed, companies in several major emerging markets now trade at a premium to their peers in developed markets.

It’s true that in the wake of the crisis and the ensuing recession, investors have taken note of the great rebalancing of economic power, shifting from West to East, and have rethought long-held beliefs about the relative security of asset classes in both developed and developing economies. But an important question arises: have companies in emerging markets changed or just investors’ perceptions of them? The question is apt in a number of emerging markets, including Brazil, India, and Russia, but it’s particularly so in China, where the reversal in premiums is most noticeable. If these valuations reflect investors’ expectations for future growth and returns, are there valid reasons to believe that those of Chinese companies have improved through the recession? Or are investors already assuming an improvement in economic realities? Economic data suggest the latter.