When a manager of $86 billion for institutions and wealthy individuals speaks of emerging markets as a hedge, you know something important has changed.
"I increasingly like emerging equities, despite their good performance, because they have become a wonderful hedge for otherwise conservative investors like us," says Jeremy Grantham, chairman of Grantham, Mayo, Van Otterloo & Co.
If the U.S. stock market should catch him by surprise and rise by, say, 20 percent over the next year, Grantham writes on the Boston money manager's Web site, "then the probabilities are very high, in our opinion, that emerging will be much better. If the U.S. does very badly, emerging is still likely to go down less by the time the market hits its low."
Until recently, it was customary to view the whole emerging-markets arena as suitable for mad money only, says Chet Currier, analyst at Bloomberg News.
Globalization has had much to do with the transformation -- bringing with it accelerating growth in countries ranging from China and India on one side of the world to Mexico and Brazil on the other, he adds. Thanks to vibrant growth, basic measures of value such as price-earnings ratios and dividend yields remain quite attractive in emerging markets as compared with U.S. stocks.
A leading performer in this category, the $1.5 billion Sanford C. Bernstein Emerging Markets Value Portfolio, has returned 15 percent so far in 2005, on top of gains of 77 percent in 2003 and 39 percent last year. At last report, it had its largest commitments spread among South Korea, Brazil, Taiwan, South Africa and India, in industries ranging from banks to steel to oil.
The Morgan Stanley Capital International Emerging Markets Index sported a price-earnings ratio of 10.8-to-1, as against 19.2-to-1 for the Standard & Poor's 500 Index. The dividend yield of the emerging index stood at 2.9 percent, compared with 2 percent for the S&P 500.
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