Emerging markets are still too dangerous to be the 'trade of the decade'

Investors searching for value have begun to look to emerging markets as the next great trade.

But buying the stocks because they're discounted may be a misstep, according to Omar Aguilar, Chief Investment Officer of Equities at Charles Schwab Investment Management.

"I always philosophically believe that while value is important, you have to look at the whole economic structure as well," Aguilar told Business Insider. "And right now based on all of the bigger factors, it's just not the best time to get into emerging markets."

For a few years, emerging market stocks have been beat up and underperformed developed markets.

With serious downturns in places such as China, Russia and Brazil impacting performance, EM have gotten stocks are incredibly cheap.

So the current bull thesis for emerging markets centers on just how historically cheap the valuation of these markets are.

Research Affiliates, a subadvisor to investing giant PIMCO, cited the emerging markets bundle's incredibly low 10x Shiller price-to-earnings ratio, and noted that in the 6 times in the past 25 years a group was this cheap returns over the next 5 years were 188%. This led to them calling emerging markets the potential "trade of a decade."

UBS quantitative analysts also called bets against emerging markets a bubble, saying that investors should expect "DM equities to underperform their EM peers." Said another way: UBS thinks it might be a good idea to be long emerging markets.

But Aguilar, whose firm manages $277 billion in assets, said that you can't just focus on the valuation picture when deciding whether to invest in emerging markets.

"You have a still strong dollar that could get stronger, weak exports, debt, and different countries have individual political issues that are holding back economic growth," said Aguilar.

For instance, Aguilar cited Brazil as a country that can look incredibly cheap (its Shiller P/E at the end of January was 7x), but it's been that way for years and - as we've noted- faces serious economic and political challenges on its road to recovery.

In Asia, Aguilar continued, China's slowdown and the dependency of many emerging markets on China for exports, the valuations may reflect each of the economies' growth prospects.

To be fair, Aguilar said the cheap nature of these stocks and the volatility in those particular markets will lead to jumps from time to time, but said a big trade on these markets probably still isn't worth the risk.

"The slow prospects for growth in many of these countries is by far more risky than [the upside] you get right now from cheap valuations," said Aguilar.

He said that emerging markets need serious reforms of their financial, government, and tax systems before they can build sustainable growth going forward. And that sort of change is neither easy nor quick.

As Aguilar said, "It is just premature to jump back into emerging markets."