Gentlemen, we have decoupled! ``Whenever the U.S. financial markets catch a cold, emerging markets essentially get a very serious case of pneumonia --that's one of the key assumptions that maybe we may need to reconsider,' Mauro Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School in Philadelphia, said. ``If there's volatility right now, it's in U.S. and European markets.'
It is the mouth of the professor of the univerity. Next the newspaper pages and then in the mouth of the taxis drivers...
Emerging-Market Stocks Grow Richer Than U.S., European Shares
Aug. 13 (Bloomberg) -- Brazil's annual inflation averaged more than 1,000 percent in the 1990s, South Korea needed a $57 billion bailout from the International Monetary Fund and Poland went through nine prime ministers.
Now, investors say emerging markets are just as stable as the U.S., Europe and Japan, and deserve a premium because their economies are growing three times as fast. Stocks in developing nations traded this month at 15.2 times estimated profit versus 14.9 times for equities in industrialized countries, data compiled by Bloomberg show. In 2005, the ratios were 8.45 and 17.3, respectively.
The shift has given Brazil's Banco Bradesco SA a higher valuation than Citigroup Inc., and made South Korean steelmaker Posco pricier than its German rival, ThyssenKrupp AG. Indian, Peruvian and Czech stocks all fell less than those in the U.S. and Western Europe in the latest global sell-off.
``We're in a different place,' said Robert Weissenstein, the New York-based chief investment officer for private banking in the Americas at Credit Suisse Group, which oversees $1.33 trillion. Shares in emerging markets ``could and should trade at a premium as those markets develop. You pay up for growth.'
Developing countries account for more than half of the world's estimated 5.2 percent economic growth this year and $5.68 trillion of foreign-currency reserves, according to IMF and Bloomberg data. Inflation in Brazil has dropped to less than 4 percent and South Korea is now a net creditor.
The changes aren't enough to warrant the prices emerging- market stocks are commanding, said the Gloom, Boom & Doom Report's Marc Faber. Developing nations' shares have outperformed developed markets for six straight years.
Tom, Dick, Harry
``Every Tom, Dick and Harry in the world knows that China is growing at 9 to 11 percent, that India is expanding rapidly,' Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd., said in Vancouver. ``But the valuations are not very compelling at the moment.'
The rise in emerging market valuations shows that investors believe there is less risk to their earnings, said Allan Conway of Schroders Plc. Governments have built up currency reserves and cut debt, insulating emerging-market companies from shocks that have depressed valuations in the past.
``This idea, `sell risky assets, sell emerging,' is complete nonsense,' said Conway, the London-based head of emerging-market equities at Schroders, which oversees $276 billion. ``They are not risky assets. That's a sentiment view and it's a view of times gone by. It is not a view for today.'
Eventually Rebound
The Morgan Stanley Capital International Emerging Markets Index will eventually rebound from the 10 percent decline it has suffered after reaching a record July 23, and will beat developed markets in 2007, according to Conway.
Since global stocks peaked on July 13, the Standard & Poor's 500 Index dropped 6.4 percent and the Dow Jones Stoxx 600 Index of European shares lost 9.8 percent in dollar terms. India, Peru and the Czech Republic fell between 3.1 percent and 6.3 percent.
Less-developed economies have a combined $484 billion in current-account surpluses, compared with deficits of $81 billion in 1997, IMF data showed.
Foreign-currency reserves ballooned almost 500 percent to $3.87 trillion in the last 10 years, according to Roubini Global Economics LLC, the research firm of Nouriel Roubini, a professor at New York University's Stern School of Business. Government debt totals 39 percent of the gross domestic product in emerging markets, compared with 89 percent for developed nations, according to Schroders.
Taking Down Risk
``Emerging countries, by and large, are stockpiling either trade dollars or petrodollars, in such a degree that they've taken the financial risk way down,' said James Swanson, who helps oversee $200 billion as chief investment strategist at MFS Investment Management in Boston.
China, Russia and India will account for half of the world's economic growth this year, the IMF said last month. Developing countries are forecast to expand 8 percent this year, compared with 2.6 percent for advanced economies, the IMF said in July.
The Washington-based fund boosted its 2007 growth forecast for China the most of any country, raising it 1.2 percentage point to 11.2 percent. The Russian economy is also beating forecasts and is set to grow 7 percent this year, more than the 6.4 percent predicted in April. For the U.S., the IMF trimmed its 2007 growth forecast to 2 percent from 2.2 percent.
`Far More Attractive'
``In the past, you wanted a PE discount and needed a risk premium because the economic fundamentals were worse,' said Conway. ``Because that's changed, there should be a switch around. The price you pay for the growth you're getting is far more attractive in emerging markets.'
Two years ago, the MSCI Emerging Markets Index traded at a 51 percent discount to the MSCI World Index of 23 developed markets. The discount has narrowed to 1.4 percent this month.
On the basis of estimated earnings for the next year, emerging markets traded at a 1.6 percent premium to developed countries this month. That would mark the first time emerging markets are more expensive than developed nations since March 2000, if analysts' earnings estimates prove correct.
For Brazilian stocks, the discount narrowed to 15 percent from 43 percent two years ago as their price-to-earnings ratio rose to 13.4 from 9.8. Investors are also paying as much for earnings of South Korean companies as they are for those in developed markets, after demanding a 47 percent discount in 2005.
Rising Valuations
Pohang, South Korea-based Posco, Asia's third-biggest steelmaker, trades at 11.6 times profit, up from 4.57 two years ago. The ratio for Dusseldorf-based ThyssenKrupp AG, Germany's largest steelmaker, rose to 8.94 from 7.1. Osasco, Brazil-based Bradesco, Brazil's second-biggest non-state bank, is valued at 16.8 times earnings, from 10.5 two years ago. Citigroup, the biggest U.S. bank and located in New York, trades at 10.4 times earnings.
Citigroup's price-to-earnings ratio has dropped from 13.2 at the start of the year on growing concern subprime mortgage losses would curb the earnings of banks and brokerages.
``Whenever the U.S. financial markets catch a cold, emerging markets essentially get a very serious case of pneumonia --that's one of the key assumptions that maybe we may need to reconsider,' Mauro Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School in Philadelphia, said. ``If there's volatility right now, it's in U.S. and European markets.'
To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net ; Daniel Hauck in New York at dhauck1@bloomberg.net . |
