Emerging Markets Ready to Re-emerge - Barron's

Emerging markets have taken a beating even worse than Wall Street's carnage. Barron's says the time may be ripe to revisit the once-loved asset class.

"They've fallen far worse than everybody else, and probably are once again cheap relative to the world's other equity markets," money-manager Ben Inker says. Inker threw in the towel on emerging markets in July, but now he's turning bullish.

So is Pimco co-chief-investment officer Mohamed El-Erian. "Is there a cyclical case now for emerging markets? Yes there is," he says. El-Erian, a recognized expert on emerging-markets, says Washington's bailout plan could spark a rally in emerging markets more acute than any domestic bounce. He suggests buying MSCI Emerging Markets (ETF: EEM).

Conditions in developing nations may well be at their best since MSCI launched its index 20 years ago. China, Malaysia, Taiwan and Russia are all building current account surpluses, and Brazil is now a net creditor. At 10.9x trailing earnings - vs. S&P 500's 23x - MSCI's index is at its lowest valuation since 2001.

Consider as well that emerging markets currently account for just 11% of global stock-market value, even though they will likely account for 28% of the world's economy by next year. David Fisher, chairman of Capital Group, expects 70% of the world's growth over the next two decades to come from emerging markets.

Russell Napier of CLSA Asia-Pacific Markets suggests sticking to markets less reliant on leverage (i.e. loan-to-deposit ratio of less than 100%), "since whole societies on the planet will spend decades deleveraging."

The loan-to-deposit ratio in Hong Kong (ETF: EWH) is 57.4%, in China (ETFs: FXI, PGJ) p 65%; Indonesia 72% (IF); the Philippines 73%; Malaysia 74% (EWM), and Taiwan 78% (EWT). The loan-to-deposit ratios in India (INP), Korea (EWY) and Thailand (THD) all exceed 100%.

Of the BRIC foursome, China's A-shares, which once commanded a 100% premium to Hong Kong-traded stocks, are today just 15% higher; one analyst likes China Mobile (CHL). Russia (RSX) trades at just 6x forward earnings, but is subject to political risk and is energy-centric. Brazil (EWZ) trades at 9x earnings, but MSCI thinks long-term growth is 15%. Morgan Stanley recommends Vale (RIO), Petrobras (PBR) and Unibanco (UBB). India is still relatively expensive; one analyst likes HDFC Bank (HDB).

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Zubin Jelveh notes that of the 70 countries tracked by MSCI, only three - Morocco, Tunisia, and Lebanon - are in positive territory YTD.

With domestic tobacco industry growth severely hampered by extensive regulation, taxes and litigation risk, Ketul Kirtikumar thinks Phillip Morris International (PM) is a free call option on emerging market growth.

Comments

[The World's...:]

Oh course they will bounce. But that is it, only a bounce.

2008 Sep 28 11:30 AM

[SA Guest:]

Perhaps El-Erian has been drinking from the same Kool-Aid cup that Bill Gross was drinking from after the Fannie Freddie bail out, when he stated that the Cat 4 economic storm had been downgraded to a Tropical Storm. Every interview I have seen featuring El Erian in the past two weeks suggested that global conditions will continue very weak into 2009 and beyond. Exports are key to most emerging economies - exactly where will they be exporting to, the US and Europe?

2008 Sep 28 02:15 PM

[jmkeynes:]

Countries that have trade surpluses, high savings rates, and high GNP growth figures are in good shape.

If their trade surplus starts to go down (due to recession in developed countries, for example) they can stimulate their economies with fiscal policy. In some countries, the high savings rate is due to government policy, so they can reduce the savings rate and increase consumption by changing government policy.

The US is in bad shape because we've been running a huge trade deficit and borrowing money from abroad to invest in housing. Unfortunately, we can't use our houses to make goods and services to sell goods and services to foreigners.

To work off the US trade deficit, we need to invest in something (e.g. windmills) that will allow us to work off our trade deficit (e.g. reduce energy imports by reducing our dependence on oil).

So, developing counties will do fine if they are in a position to stimulate domestic consumer spending, and many are in this position.

Developed countries (the US in particular) will do better as soon as we come up with a viable industrial policy (e.g. we kick the housing habit and switch to building out our alternative energy infrastructure).

2008 Sep 28 02:59 PM

[cabaretvolt...:]

El-Erian may be right but I think too early to recommend buying into the emerging market. It's like catching a falling knife with bear rally along the way. Better wait for bottoming out process or confirmed breath-thru from bottom than to get in early.

2008 Sep 28 03:00 PM

[User 265729:]

Pedestrians who get hit by cars also bounce.

2008 Sep 28 03:30 PM

[MarkC704:]

Contrary to popular wisdom as exemplified above, not all emerging economies live or die on exports. One may quibble how "emerging" China's economy is, but exports are a minor (albeit significant) element of it's growth. In fact, "...even if the contribution from net exports fell to zero, China's GDP growth would still be close to 9% thanks to strong domestic demand." (Economist, Jan 2008).

2008 Sep 28 03:35 PM

[SA Guest:]

- The full Barrons Article (Free Access)

online.barrons.com/art...?

-Washington Post on emerging markets: Sept 13

www.washingtonpost.com...


-Marc Faber on emerging markets Sept 26

www.bloomberg.com/avp/...


-EMM Chart 5 year

tinyurl.com/4h58qd

2008 Sep 28 05:07 PM

[theoilyboy:]

my best strategy over the past few months.... do exactly the opposite of what Barrons said. Gonna stock up on more EEV based on this latest Barron 'insight'

2008 Sep 29 12:24 AM

[huangjin:]

Emerging market moves typically last for years, not months.

2008 Sep 29 08:28 AM

[MistaWhite:]

The loan-to-deposit ratio in Hong Kong (ETF: EWH) is 57.4%, in China (ETFs: FXI, PGJ) p 65%; Indonesia 72% (IF); the Philippines 73%; Malaysia 74% (EWM), and Taiwan 78% (EWT). The loan-to-deposit ratios in India (INP), Korea (EWY) and Thailand (THD) all exceed 100%.

If I am correct, doesn't the higher ratio mean the banks rely on borrowed money? If this is the case, aren't these historically high? or at least high enough to be worried with all the credit crisis going around?

Thanks

2008 Sep 29 09:12 AM

[Al-USA:]

Barrons is wrong again: emerging markets have not only failed to re-emerge, they have plunged to all time depts, with EEM down an additional -38.9% from Sep 28, 2008 article. To date EEM is now down -65%.

The article did provide a good clue, namely listening to Barrons would have gotten you much closer to the "poor house".

2008 Oct 28 05:05 AM