Emerging Markets Stocks: An Overvalued Asset Class?

The following was excerpted from Agile Investments' special report on emerging markets stocks:

Prior to the bull run of the past five years, the price-to-earnings (P/E) multiple of emerging markets stocks historically averaged approximately 75% of the P/E multiple of developed markets stocks (including the U.S.), and the price-to-book multiple averaged 67% that of developed markets. Over this period (1985-2002), whenever emerging markets valuations moved to parity or to a premium to developed markets valuations, it was a signal to reduce exposure or avoid the asset class. The traditional attitude towards emerging markets stocks was that they warranted a discounted valuation because of their greater risk characteristics, their dependence on export activity rather than domestic demand, and their propensity to suffer political and economic crises.

Today, emerging markets stocks are valued at a significant premium to foreign developed markets stocks and a modest discount to U.S. stocks (see Exhibit 2). The current 20x P/E multiple of the S&P 500 is somewhat misleading because of the heavy write downs that U.S. financial firms have taken in recent quarters. On the basis of calendar 2008 estimated earnings, the P/E multiples of the S&P 500 and the emerging markets index are much closer, at 15.7x, and 13.9x, respectively.

Comments

[johnthebear]

I compared the shape of the rise and fall of the NASDAQ in 2000 to the current market pattern in China and India and their fall to date from the high points to a more significant drop by year end.

It is a bubble led by "advisors" who are telling everyone to invest in Asia to avoid the USA. Well, it seems to me that when we slow down, we force Europe to also slow down, which in turn causes Asia to slow as well. When the chips start to drop, it won't be pretty.

Too much money laying around that investors don't understand how to preserve. They are still more interested in rate of return than preservation of capital. When it is too late, they will regret their mistakes.

The CMBS and RMBS markets are dead, and there is limited financing to buy companies or real estate, which means the markets are due to fall.

[fxtrader07]

i couldn't agree more with johnthebear.
but then again, the sky may not fall and it is always tempting to buy into seemingly undervalued and promising companies and markets even while being fully aware of the "preservation of capital" maxime.
these are exactly the junctures when the real smart money lays the foundatioon of outeperformance versus most mutual funds and retail investors. either by buying into the right opportunities and/or by holding cash for a longer time than most everybody else.