Emerging Markets: Valuation and Country Themes (ETFs: EEM, EWZ, EWY; CEFs: MSF, TRF)

Roger Nusbaum submits: Regular reader Jay Walker -- who has a pretty good blog of his own -- left the following comment on a recent post:

some [emerging markets] like Russia, Brazil and Korea are all expected to have earnings growth exceeding 12% or so this year, and all have a P/E ratio (for their national stock market) below 12.

In my view, that's good growth, that can be acquired cheaply. A winning combination, I think. Better than investing in the S&P500 at 18 P/E with expected earnings growth maybe - maybe - getting to 10% this year.

I think the right type of investor just has to look at some of the better emerging markets.

A couple of things I would note: First, most emerging markets are always much cheaper than the US. A market that always trades at ten times earnings is not that cheap, however, at when it is trading at ten times. It is cheaper, which is not a bad thing, but not necessarily cheap. A lot of emerging markets have traded in the single digits versus their earnings. In the last couple of years a lot of emerging markets have become more expensive relative to the last 15 years. If you are a value investor, you may want to study this a bit more.

I would also add that P/E ratios are not great predictors of future moves. P/E ratios do offer more room for cushioning the blow from a mistake or other downturn.

Also important would be country selection. Jay mentions Russia, Brazil and Korea. The three are very different from one another.

Russia is obviously resource-rich. It has a type of political risk that is unique (in my opinion) to other countries. They have surprised the world before and probably will again.

Korea is more thought of as manufacturing stuff for electronics. I would classify their exports along these lines of what the world wants. Who doesn't want a new TV or digital camera and so on?

Although it does not get talked about much, Korea has some issues with consumer indebtedness that may or may not create a problem for the country. If you have an interest in owning Korea, I would suggest studying this more.

Brazil is more known for producing what the world needs. After the white-hot run for most emerging markets I think countries like Brazil will be relatively less risky. Growing demand for natural resources creates a strong investment tailwind.

On Cavuto On Business, Dani Hughes said she was taking a page from John Rutledge's playbook and going with an emerging market ETF, the Morgan Stanley Emerging Market Fund (MSF). You can decide for yourself how important it is that she may not know the difference between an ETF and a CEF, which is what her selection is.

MSF has done well at capturing the asset class. Over the last three years it performance has been very similar to the iShares Emerging Market Fund (EEM). The biggest disadvantage of MSF is probably some of the larger taxable distributions it has paid over the last few years. Watch out if you buy it in taxable account.

I can't recall Ms. Hughes having mentioned emerging markets before (anyone feel free to jump in to correct me). If we see a lot of people that have not been talking about emerging markets start to get excited about them, watch out. We are already seeing some additional TV coverage and otherwise giddy talk about them. One thing we can bet on is that main-stream-media will never see a major top coming.