Why I'm Getting Bullish on Emerging Markets Right Now
By Chris Mayer, editor, Mayer's Special Situations
September 25, 2008
For most of the past five years, the world's biggest investment story has been the growth of the BRICs.
This is the acronym for the countries of Brazil, Russia, India, and China. All four have huge populations and rapidly growing economies. And all four draw a tremendous amount of attention from investors.
The MSCI Emerging Markets Index (which has a heavy weighting toward the BRICs) rose 40% last year, even while the credit crisis swallowed banking profits and hobbled balance sheets around the globe.
And why not? The emerging market story was powerful and seductive. Large populations building more factories, power plants, and roads; burning more oil, coal, and gas; eating more meat; buying more cell phones; installing more Internet connections; and on and on. It was a huge growth curve jammed in a short amount of time. And it seemed to have a long way to go.
But this story has changed a lot in 2008...
Investors no longer love the emerging markets. With a global slowdown in the offing, investor sentiment has shifted hard and fast. Through August 29, China's Shanghai Composite dropped 52% this year. India is down 37%. Russia is off 27%. Brazil seems to have gotten off easy, down only 5%. The damage looks even worse, though, when you consider how far these markets are off their highs.
Bespoke Investment revealed the claw marks of the bear market at work. China is off by 64%. Russia down 41%. India took a breather at negative 32%. The question now is do we buy, sell, or hold? The short answer: Emerging markets are a buy – with a caveat.
The selloff is making things striking on the valuation front... which makes me bullish here. As you can see from the chart below, emerging markets haven't looked this cheap on a forward earnings basis in 20 years...
The fall in emerging markets is not an isolated event. It's happening within the broader bear market hitting world markets. Based on past cycles over the last 38 years, we've still got a little way to go before we hit the average share price damage of past cycles. What's also interesting here is how strong returns are one year after reaching bottom. If we hit bottom this month, we could see strong returns in the next 12 months.
Bear Markets of the Past |
MSCI
World
Peak |
MSCI
World
Trough |
Days from
Peak to
Trough |
Peak-to-
Trough
Returns |
Return One
Year After
Trough |
1/29/70 |
7/30/70 |
182 |
-20% |
28% |
1/30/73 |
10/30/74 |
638 |
-45% |
26% |
8/13/81 |
8/12/82 |
364 |
-20% |
50% |
8/25/87 |
12/04/87 |
101 |
-27% |
23% |
1/03/90 |
9/28/90 |
268 |
-29% |
23% |
7/20/98 |
10/08/98 |
80 |
-24% |
40% |
3/24/00 |
3/12/03 |
1,083 |
-52% |
40% |
| Average |
|
388 |
-31% |
33% |
Current Cycle Comparison* |
10/12/07 |
7/15/08 |
? |
-22% |
? |
*Using Total Return Index. Price Index peaked 13 July 2007 at 1,206.3.
Source: Fact Set MSCI. |
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Emerging markets could rebound with even bigger returns because the valuations are lower than in the mature markets and the growth rates are better.
So I think emerging markets are a long-term buy. The caveat is simply that all emerging markets are not the same. Some will perform better than others.
As for which ones specifically, my long-time readers know I favor India. I'm in the same camp as Steve and Tom (read their thoughts here and here) when it comes to that country. Russian stocks are also interesting at these levels. Russia as an investment has some "warts" on it, but it's extremely rich in natural resources. It's also cheap... trading for eight times 2009 earnings.
Which countries you ultimately choose to buy won't be as important as the larger picture here. The BRIC story is a long-term idea. These countries are going to be a lot richer and more powerful in 10 years than they are now. And right now, they're as cheap as they've been in a long time.
Good investing,
Chris Mayer
Editor's note: Chris Mayer writes Mayer's Special Situations, a monthly advisory we consider required reading at DailyWealth. With Chris' research, you can always count on contrarian investment ideas you won't read about anywhere else.
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A SMALL BULLISH SIGN FROM THE PROPERTY MARKET
Today, we look at one of the most interesting trends in the market right now: The strength in "IYR."
IYR is the ticker for one of the market's largest and most liquid ways to buy commercial real estate, the iShares Real Estate ETF. This fund is loaded with America's largest owners of apartments, office buildings, warehouses, and shopping malls. It reached a speculative peak in February 2007.
Then, as we predicted in July 2007, commercial real estate was clobbered. IYR lost 30% of its value and reached a low this July. But in the past few weeks, as news of Wall Street's bankruptcy dominated the wires, IYR held like a rock. It's a small bullish sign from the property market.
We can't know exactly how the mortgage debacle will play out. Another terrible leg down could be around the corner... or America could slog out the weakness for years.
We can, however, get clues from the forward-looking stock market about the state of things. In this case, the market is saying, "July was the worst I could throw at commercial real estate. Even the demise of Wall Street couldn't send it lower." We see this action as a small ray of light peaking through the clouds. And we're keeping a close eye on IYR.
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Investors in gold-backed exchange-traded funds (ETFs) have amassed a record 1,039.68 tonnes of bullion, becoming the largest holders of gold after the reserves of the US, Germany, the International Monetary Fund, Italy, France and Switzerland.
The purchases partly reflect concerns over the health of US financial institutions and safe-haven buying spurred by a weakening dollar.
Investors' bullion assets have risen by 31 per cent in the past 12 months and have almost doubled since September 2006, according to statistics compiled by the industry-backed World Gold Council. The world's largest bullion-backed ETF, the New York-listed SPDR Gold Trust, saw a 30.2 tonnes inflow on Monday, bringing its holdings to an all-time high of 709.2 tonnes. |
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Throngs of depositors lined up Wednesday at the Bank of East Asia here to withdraw their money, underlining widespread public nervousness in Asia that Wall Street's recent difficulties might spread across the Pacific.
The bank run was the first in an Asian financial center since Wall Street's turmoil escalated this month. It followed a rush last week in Hong Kong and Singapore by some policyholders to withdraw money from American International Group, the insurance company.
Standard & Poor's reduced the credit outlook for six Asian banks and six Asian insurers from positive to stable late last week, expressing concern not so much about the short-term prospects for Asian financial institutions - practically none had sizable exposures to U.S. mortgage-backed securities or Lehman Brothers - but rather about the longer-term consequences of a probable slowing in export-dependent Asian economies. |
– International Herald Tribune
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Prior to last week's turmoil, the Independent Budget Office had forecast 33,000 Wall Street jobs would disappear in the current downturn. Now, even more are likely to go.
And since the securities industry drives the local economy – the sector accounts for 5% of [New York's] jobs but as much as 23% of its wages – the cutbacks will reverberate throughout the five boroughs. Wall Street salaries average $340,000, or more than five times those in the rest of the city's economy. Each securities job creates two others, according to the state comptroller's office, meaning the hurt will be felt everywhere from retail and restaurants to law and accounting.
Economists have predicted the city will shed as many as 90,000 jobs during this downturn. |
– Crain's New York |
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