Barron’s released an article on September 29th entitled “It’s
Time to Revisit Emerging Markets.” I’ll get more into their rationale, but
the gist is that EM stocks (especially in China and Asia), have fallen so much
while maintaining positive debt ratios, that they are looking like good buys
since they are quite cheap.
The article cites that “Brazil is off 23%, Mexico 13%, Russia 43%, China 16%,
and Korea 12%… since July.” While in reality, after the turbulence today, Emerginvest’s heat map cites that it is
even more egregious: in the last quarter, Brazil is down 25%, Mexico 18.9%,
Russia 51%, China 22%, etc. compared to the recent downturn where the U.S. is
down by 16.4% for the quarter.
Ironically however, that only strengthens the article’s argument. It
describes how Mohammed El-Erian, the co-CIO of PIMCO (who also happens to be an
emerging markets expert), is still quite optimistic about emerging markets
returns. He states: “Technically, you’ll see an even sharper rally in emerging
markets than U.S. equities. I’d at this point be looking to buy the [MSCI
Emerging Markets] index.” (EEM) The article fully admits that emerging markets
will be affected, however it states that Morgan Stanley believes it will slow to
somewhere around 7% growth in the first part of ’09.
It cited how the MSCI index was trading at a 10.9-x multiple of trailing
earnings, the lowest valuation of the last 7 years. In addition, it discusses
how projections of the continued growth of emerging markets (contrasted with
developed markets attempting to dig themselves out of the credit crisis for the
foreseeable future) compliments the cheap prices: “David Fisher, chairman of
Capital Group, recently said he expects 70% of the world’s growth over the next
two decades to come from the emerging markets. At the moment, they account for
just 11% of the world’s stock-market value, even though JPMorgan Chase reckons
they’ll account for 28% of the global economy next year.”
It advises that many (if not all) of the emerging market opportunities look
interesting, yet points to Asia (ADRA)and China (FXI) specifically. One method
it used to select attractive indexes/countries was to consider their
loan-to-deposit ratio. They say if it’s “over 100%, there’s a very high
probability the whole country will need to delever.” Using this metric it picks
out Hong Kong (57.4%), China (65%), Indonesia (72%), the Philippines (73%),
Malaysia (74%), and Taiwan (78%), yet specifically points to China (FXI)(how it
dropped due to inflation fears, but those have diminished and might expect a
rebound). It singles out China Mobile (CHL) as an example of a company which has
dropped significantly (43%) of its share price, but has continued to grow
revenue and margins.
Underlying this argument is that since many of the debt ratios of Asian
countries in particular (in addition to some strong growth prospects), they
won’t have the same credit problems internally as many developed markets will.
In addition, with today’s heavy downswing, they might look like attractive
options.
Well, hope you enjoy and look forward to writing more later.
