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In the last two weeks, the Emerging Market index gained +9.7%, as
compared to +4.4% for the EAFE Index. Europe and the Emerging markets
are moving in the same direction finally, but still at very different
speeds. The USA looks anemic by comparison, and has fallen to very
near the bottom of our rankings.
It is increasingly difficult to generalize about share valuations
in Emerging Markets. At one extreme, China and Latin America are
trading at 3.6x and 4x book value, but two other indexes at the top
of our rankings, Brazil, and S. Korea, have the low ratios more typical
of European countries. Belgium has the lowest P/B ratio, which is
to be expected, given the high concentration of financial companies.
Some analysts predicted that China’s shares would fall this
month and Hong Kong’s would rise as a result of the loosening
of investment restrictions for Chinese citizens. Instead, China is
up almost 15% in less than two weeks, and Hong Kong is up more than
13%. Even though the valuation scores for these two regions are decreasing
rapidly, this kind of momentum keeps the shorts at bay.
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| High-beta investments are dependent upon and correlated
with the broader stock market and have higher systematic risk and overall
volatility. In the analysis, almost all of the emerging market ETFs
studied had higher betas than average, which helped to explain both
their outperformance over the past year and their high volatility.
The highest betas were seen in Mexico, Brazil, Latin America, and S.
Africa.
Beta is often used to adjust returns for expected risk, and creating
high-beta portfolios can be a way to gain additional leverage on
the market. However, it should be noted that the variable is correlated
with past performance and is not necessarily indicative of future
return.
Many high-beta and high-performing ETFs are comprised of relatively
smaller stocks, as is indicated their lower weighted market caps.
These funds will tend to appreciate more rapidly under conditions
of increased money flow, moving further and faster than other, larger-cap
investments. China is an obvious exception, and its weighted market
cap is now higher than that of any developed country. |
| METHODOLOGY: ETF
prices are compiled daily from Yahoo! Finance/Morningstar data.
Published valuation ratios
are used and then adjusted based on daily price changes. Correlations
are based upon one year, and volatility is based upon twenty-two
market days.
The scores from 0 (worst) to 4 (best) represent
the range (2 +/- 2 standard deviations) of normalized variables
for a category. For example, a valuation score of 3 for a country
indicates that the valuation variables (p/e, p/b, and p/cf)
equal-weighted, are one standard deviation better than the
average for the group.
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