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The Transparent Analyst is an investment professional in a buy-side environment. Previously, he spent four years working in a corporate finance role for a fortune 100 company. He is a recent MBA graduate and a Chartered Financial Analyst. He joined this site to refine his ideas on an open forum,... More
  • Emerging Market Bubble? Not yet 0 comments
    Nov 10, 2010 6:18 PM | about stocks: VWO, EEM, PGJ, FXI
    The concept of an emerging market bubble is picking up steam, but simple analysis will not back this up. That said, at some point an emerging bubble will form, but those drivers are exactly why you want to be invested right now. 

    One of the easiest calls to make regarding near-term money flows are the emerging markets. Pension funds are in bad shape. The lower interest rates are wreaking havoc on funded status through higher liabilities and lower expected returns. Whether "achievable" expected returns are being factored in or not is an interesting topic, but, regardless, trustees will need to focus on higher returns. Tee up the emerging markets. Pension funds were under-allocated in the previous market cycle, and the expected growth will be too enticing to pass up again.

    This situation should create some compelling returns assuming the macro environment holds up globally. 

    Valuations in the BRIC (Brazil, Russia, India, China) countries back this thesis up. Current and future PE multiples are all low compared to their historical averages. EV-to-EBITDA also look interesting across the board. Based on these metrics, China looks the most interesting right now with a Current PE Multiple of 14.1x against a historical average of 17.0x. 

     Now, specifically where/how do you invest in emerging markets? I prefer VWO compared to EEM for a basic emerging markets ETF due to the lower fees. The EEM charges significantly higher fees even though they all but removed their optimized selection strategy after the crisis.

    If you are interested in China specifically, PGJ offers something similar to the MSCI Golden Dragon. FXI is another one, but it is more concentrated with an extreme bias towards financials. 




    Disclosure: None
    Stocks: VWO, EEM, PGJ, FXI
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