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Emerging Markets Valuations Are Cheaper Than in 2009


theasiareport
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Article link here: http://on.ft.com/1hHRUZL via @FT

 

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Analysis by JPMorgan Asset Management shows that the benchmark MSCI EM index was trading on a price/book ratio of 1.28 as of late August (see the first chart), suggesting that even if a company went bankrupt, investors would get back almost 80 per cent of their money by selling the underlying assets.

 

This ratio is now below the troughs witnessed during the global financial crisis and has only been lower twice in the past 20 years: fleetingly after September 11, 2001 and more tellingly during the 1997-98 Asian financial crises.

 

JPM AM went on to analyse the returns investors who bought in at similarly low price/book ratios enjoyed over the subsequent 12 months. In every case during the past 20 years they have made money, often as much as 50-60 per cent (see the second chart).

 

“Emerging markets have only been this cheap 3 per cent of the time since 1989. Now is not the time to become more negative on the asset class,” says Richard Titherington, chief investment officer, emerging markets and Asia Pacific equities, at JPMorgan AM.

 

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Comments:

Plenty of really cheap stuff in EM. On a micro level, I am seeing plenty of stocks trading at 2011 valuations. And its not limited to small cap, highly leveraged entities. Just take a look at Samsung or Hyundai in South Korea!

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Analysis by JPMorgan Asset Management shows that the benchmark MSCI EM index was trading on a price/book ratio of 1.28 as of late August (see the first chart), suggesting that even if a company went bankrupt, investors would get back almost 80 per cent of their money by selling the underlying assets.

 

This quote makes no sense unless if he means a book/price ratio of 1.28 and not a price/book ratio of 1.28.

 

On a related note, I was unfortunate enough to notice the absolute and relative cheapness a year ago and moved heavily in. I've been adding into the decline, but now am much more cautious given my concerns over the global economy and the already heavy weighting in my portfolio. No doubt good value though - if you weren't early like me, it's definitely worth considering adding here for long-term holds.

 

Emerging markets have better demographics and generally better debt profiles than does the developed world so there's better long-term growth prospects. Also, in a world with 0% rates, EM is one of the few spots where you can still get extremely high real yields.

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Guest Grey512

Like TwoCitiesCapital, I also noticed the EM valuation disparity and made some EM investments last year, but my enthusiasm for EM is tempered by:

1. Higher commissions and transaction costs. Some markets are completely off-limits (depends on the broker).

 

2. FX. For instance - MTN of South Africa is a nice idea. But In US$ terms, the stock price over the past 5 years has gone nowhere.

 

3. A big chunk of EM-listed companies are natural resource companies. I am generally biased against those, and that (in a way) "saved me" in the past 18 months.

 

4. Another big chunk of EM-listed companies are banks / FIG. When it comes to EM, I stay wary of FIG - easy for owners/management to siphon off money for themselves or their families via fake loans, etc. Difficult to gauge quality of underwriting.

 

5. Yet another significant chunk of EM-listed names are electronics / semi companies. Not a huge fan of those due to the commoditized, brutally-competitive nature of those markets. So: once you exclude semis, FIG and natural resources, there is often not a lot of investable names (for me) out there.

 

6. Depends on the geography, but often when I see an EM name that is optically cheap (low P/E), I get excited and then I pull apart the cash flow statement and the balance sheet and those pour cold water on me. E.g. look at some Russian companies: big difference between net incomes and FCF. All sorts of weird line items like "other financing", different forms of capex, loans to related parties, etc.

 

For those reasons, no matter how hard I try to increase my EM exposure, after I go through my usual process, 90%+ of the EM names I look at just fall by the wayside.

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The transactional costs and information asymmetry are definitely a problem. I felt that acutely when I was based in London for a couple of years. I am now based in Singapore, making life a lot easier.

 

Over the years, I've felt that the best places to look at are still Singapore, Hong Kong and to a certain extent South Korea. Singapore & Hong Kong have in place common law jurisdictions, making life a lot easier.

 

Of course, there are plenty of "value-traps" around... but that's the same in every country. The trade off is that valuations are by far cheaper than the developed markets.

 

I really recommend taking a plane down to Hong Kong or Singapore to get a feel for the place. Or ever Japan for that matter.

 

On the reverse, I almost never invest in a country that I've not been to before. There's only so much you can get from Western Media and Bloomberg. There are plenty of local news sources that you just miss.

 

I recommend these places:

 

Shareinvestor.com (Singapore)

Quamnet (Hong Kong)

Thaistocks.com (Thailand)

 

Cheers,

 

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