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In looking at the world’s emerging markets in order to decide which ones to buy in 2011, start with two questions: 1) Is the market cheap? and 2) Has it under-
performed over the past year?
If the answer is ‘yes’ to both questions, that market’s worth a closer look. But there are always exceptions. Most investors who buy emerging market stocks don’t have a good handle on the political and economic risks of the country. When the market starts to rise, they get excited and jump in to avoid getting left behind. That’s why emerging markets tend to overshoot on the upside.
The best four emerging markets in terms of performance since January 2010 are Thailand, Peru, Chile and Indonesia. Of these four economies, Peru has a ridiculously high Price/Earnings (P/E) ratio of 44.9 according to The Financial Times. Indonesia and Chile are also fully valued at more than 20 times earnings. Only Thailand looks reasonably valued at about 14 times earnings. However, I’d avoid Thailand because it continues to face a lot of internal political risk.
India appears overvalued with a P/E ratio of 25. Russia is up only 7.5% this year and trading at a P/E of only 9.3. The Economist has Russia growing 4.0% in 2011, not bad for a country with a corrupt government and a static population. But you’re still playing ‘Russian stock market roulette’. I’d avoid both India and Russia for now.
My picks for top performing emerging markets in 2011 are: China, Brazil, Turkey, Vietnam, and Chile.Comments on China and Chile follow:
\China – China currently looks the most interesting (in spite of bubble predictions I some quarters) with a P/E multiple of 14.1 (historical average is 17). The most straightforward to play China is the EFT,iShares FTSE/Xinhua (FXI), although regular followers of StocksonWallStreet will know that I often comment on individual Chinese stocks. One word of caution on China: there’s a lot of fraud in the small-cap sector. You can buy a portfolio of companies and hope not more than 25-30% of them are fraudulent. You should still make enough on the winners to cover your losers.
Chile – Yes, its lofty P/E of 23 is expensive, and its stock market is up 41% in 2010. However, the country is just emerging from recession and it has an excellent government with policies that appear likely to drive growth. Sometimes – not often – high valuations are justified. I believe Chile may be one such example. The easiest way to buy Chile is the EFT, iShares MSCI Chile Investable Market Index Fund (ECH). Individual stocks worth a look: Vina Concha y Toro SA (VCO), a premium wine exporter, with a 4% dividend.
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