Barron's Interviews Emerging Markets Guru Arjun Divecha

by: SA Eli Hoffmann

Excerpt from our One Page Barron's Summary (receive it weekly by email by signing up here):

Emerging and Converging by Sandra Ward

Highlighted companies: Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE:TSM), Petrobras Energia Participaciones S.A. (NYSE:PZE), Companhia Vale do Rio Doce (NYSE:RIO), China Mobile Limited (NYSE:CHL)
Summary: Barron's interviews Arjun Divecha, Partner of Grantham, Mayo, Van Otterloo and pioneer in emerging-markets investing. Five years ago emerging markets traded at about 9x earnings. Since then, they're up 250% and trade at 13x earnings. The fact they're only at 13x times earnings proves how much the fundamentals have improved, but at the same time makes it is hard to say emerging markets are a 'screaming buy' -- but relative to other equities, they certainly are cheaper. Some key points:

  • He sees nothing on the horizon that looks ugly in most emerging markets. If there is going to be a crisis, he says, it is going to come out of the U.S. or the developed markets, not the emerging markets.
  • Because many emerging markets are dollar linked, those who are worried about the dollar should stay away.
  • He is most overweight Taiwan, which has underperformed other emerging markets by 136% in the last five years. He likes Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), which has a 50% market share in global foundry, enabling them to set pricing terms due to their overwhelming size. The current tech slump has 2007 forecasts down 20%.
  • He still likes Thailand, despite their recent currency control debacle.
  • Brazil stands to gain from falling interest rates. He likes everything there, but cautions that Petrobras Energia Participaciones S.A. (PZE) and Companhia Vale do Rio Doce (RIO), which make up a big part of its stock index, may be hit by lower energy/commodity prices.
  • Korea was hit by a consumer lending credit-card bubble in 2002-2003. But at 10-11x earnings, it's cheap -- a buy and hold.
  • India is his 'least favorite market' because of its valuations (20x earnings). A huge speculative boom leaves little upside room and much risk, and it doesn't yet have the infrastructure to support its 8% GDP growth.
  • Slightly positive on China. He likes consumer-oriented stocks such as China Mobile Limited (CHL) which stand to benefit from a governmental shift from export- to domestic-oriented.
Related: Emerging market ETFs include: BLDRS Emerging Markets 50 ADR Index (NASDAQ:ADRE), iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), iShares MSCI Brazil Index ETF (NYSEARCA:EWZ), iShares MSCI Malaysia Index (NYSEARCA:EWM), iShares MSCI Mexico Index ETF (NYSEARCA:EWW), iShares MSCI South Africa Index (NYSEARCA:EZA), iShares MSCI South Korea Index Fund ETF (NYSEARCA:EWY), iShares MSCI Taiwan Index (NYSEARCA:EWT), Vanguard Emerging Markets Stock VIPERs (NYSEARCA:VWO), Claymore/BNY BRIC ETF (NYSEARCA:EEB)