Emerging market equities will rise after volatility calms, research shows. Which EM is the cheapest so far?

As Capital Economics found out, the MSCI Emerging Markets Index's 11 percent decline in local currency terms so far this month has pressed its 12-month forward price-to-earnings (P/E) ratio to 9.4 – a touch below its 5-year average of 10.

The valuation gap between MSCI World Index - tracking 23 developed markets - and MSCI Emerging Markets is now at its broadest point since before the global financial crisis.

The MSCI World Index is trading at a forward P/E ratio of 13.9. A higher P/E ratio means stocks are relatively pricey compared with earnings.

John Higgins, chief markets economist at Capital Economics, explained that emerging market equity valuations are no longer widened either in an absolute or relative sense after the summer sell-off.

"Once the recent volatility in global markets settles down, we think that these valuations could rise, leading to some outperformance of EM equities in the months ahead," he commented.

Which is the cheapest market to date?

According to Capital Economics, Russia is currently the cheapest on an absolute basis. The forward P/E ratio for the MSCI Russia Index stands at 4.9 – compared with its 5-year average of 5.2.

The findings are based on an analysis of 20 individual MSCI EM country indexes.

The MSCI Egypt Index takes the second place, with a forward P/E ratio of 7.3; however, it remains above its 4.3 long-term average.

The Chinese gauge is not far, with a forward P/E ratio of 7.8, 13 percent below its historical average of 9. The MSCI China index has a lower P/E ratio than the Shanghai Composite, the biggest gauge in the mailand. That is because the MSCI index largely tracks Chinese companies listed in Hong Kong, or H-shares, which typically trade at a discount to A-shares – Chinese companies listed in the mainland.