Feature
SATURDAY, APRIL 9, 2011
Revenge of the Emerging Markets
Since late last summer, most emerging-market indexes have done something unusual. They've significantly underperformed developed-market stocks for an extended period, particularly the U.S.
Inflation and rising interest rates in places like China and Turkey, among other emerging markets, has tempered investors' ardor for far-flung locales. Couple that with Middle East unrest and surprising U.S. economic strength this year, and it's no mystery why investment flows have moved away from developing markets.
The Standard & Poor's 500 index of big U.S. stocks has, since Aug. 31, logged roughly double the returns of most emerging markets, in dollar terms. Only Russia, with its stock market heavily tied to sharply rising oil prices, has done better.
.
Emerging-market stocks, however, should regain their strong form soon, thanks to the better long-term economic and profits growth expected in Brazil, India, Russia and China, the so-called BRIC nations. Turkey, South Africa and other up-and-comers could also prove strong. Developing countries' stocks have trounced the S&P 500 since 2005, with even the lowest returns exhibited, 64% by both Russia and Turkey, towering above the 12% in the U.S.
While each emerging market has its particular risks, the ground lost since the summer gives long-term investors some inexpensive entry points. Brazil, South Africa, Turkey and Russia offer some of the lowest valuations among developing countries. Stocks like Brazil's Petrobras (ticker: PBR) and Tractebel Energia (TBLEY), Turkey's Akbank (AKBTY) and South Africa's Sasol (SSL) could be propelled upward as their home markets recover.
..
.
.
A recovery will get support from receding negative factors, especially fears of rising interest rates. Investors have been fretting that commodity inflation, especially in food, will cause developing countries to forcefully tighten their monetary policies.
.
China's tightening came earlier and was more aggressive than expected, for example. But London-based Goldman Sachs strategist Sharon Bell says, "the early part of the tightening cycle is over in emerging markets, and growth momentum is likely to accelerate for the rest of the year."
Now, the risk of rising interest rates is shifting to the developed markets, Bell points out. Just last week the European Central Bank began hiking rates. And after years of easy money, higher U.S. interest rates are only a matter of time.
Investors have made a tactical shift to the U.S., notes Michael Gavin, Barclays Capital's head of emerging-markets strategy. But long-run fundamentals still favor emerging markets, he says, and by the time the U.S. begins raising rates—Barclays figures August 2012—the drama of emerging-market monetary tightening will have passed. Moreover, investors in U.S. stocks may anticipate a rate hike long before the Federal Reserve moves, putting pressure on the shares relatively soon.
![[Emerging bar]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_twMLz88sCH3Oz6hVXds0uXx_GX-VIyRUoTrDBrlTGuW_yjrmaTytvhnczMa8Oh7uLIedbV8UPNrH8XQZq6pA9zL6h_5qiMTywR2SoqGUuz6QXoHvpEJK1jJkuDZcesO_kDK7G8FtiVLPnAIS55Dy872knQIhj1OQ=s0-d)
.
"Despite the more advanced tightening process in emerging markets, we still expect a healthy 7.4% gross domestic product growth in emerging markets this year," Bell says. "This compares to 2.2% for a developed market like Europe, for example." U.S. growth will be higher, but at around 3%, not by much.
ONE WAY TO PLAY THE RECOVERY in developing markets, according to Goldman Sachs, is the broad iShares MSCI Emerging Markets Index (EEM), an exchange-traded fund that, like many of the countries it represents, has underperformed. Another route: country-specific ETFs of Brazil, Turkey or South Africa, among others.
Technical market indicators also bode well for the developing world. Most importantly, global equity fund flows turned significantly positive in the last week of March, totaling $2.6 billion, the first big inflow since early January, according to research firm EPFR Global. Flows had steadily declined late last year and then went heavily negative in the first quarter, the worst for emerging-market flows since the third quarter of 2008.
.
At the same time, Indian, Russian, Brazilian, and Turkish indexes are all showing important moves above their 50-day or 200-day moving averages, according to data from Strategas and Auerbach Grayson. Broadly speaking, emerging-market indexes have firmed up over the past few weeks, notes Christopher Verrone, a Strategas analyst, and certain bellwether stocks show improved trading patterns.
.
One of those is Brazilian energy giant Petrobras, whose shares have broken above the 50-day and 200-day moving average. That bodes well for the country's Bovespa index, given that Petrobas accounts for more than 10% of its value. Petrobras' expected production growth rivals the oil majors and its shares trade at the relatively inexpensive price to earnings ratio of 10 times consensus analyst earnings per share estimates for 2012, while EPS is seen growing 9%.
.
Some canny money managers already are returning to emerging markets. Jacob de Tusch-Lec, a fund manager with Artemis Investment Management, has been buying Akbank, Turkey's most prominent bank.
.
"I'm willing to go through cyclical inflation for the secular long term, he says. Akbank is generally disliked by analysts, a bullish contrarian sign. It sports a strong balance sheet, a 2012 price-to-earnings ratio of 11 and likely EPS growth of 10% or better.
.
After shedding all his emerging-market exposure last fall, Alan Miller, a money manager at London based SCM Private, recently bought the iShares MSCI Turkey ETF (TUR). Inflation is an issue in Turkey but the central bank there appears to be ahead of the curve.
SCM is attracted by strong economic growth in Turkey, favorable demographics, the valuation of its largest equities— typically less than 10 times this year's earnings—and double-digit profit growth.
Brazilian power company Tractebel Energia also looks promising. As a utility it's a defensive asset, de Tusch-Lee notes, but it also is growing much faster than a developed market utility; analysts expect EPS to rise 16% next year. The stock is trading at less than 12 times next year's expected earnings.
.
.
South Africa's Sasol is in technological class by itself. It's one of the few large publicly traded companies that turns natural gas and coal into petrochemicals like diesel fuel. Thanks to abundant shale gas around the world, costs are low. Sasol trades at nine times EPS estimates for the year ending June 2012, and profit growth could hit 25%.
.
Russia, for its part, is a special case. It's dominated by huge energy companies, and is essentially a proxy for oil prices. John Derrick, a co-manager of U.S. Global Investors Eastern European fund (EUROX) says reinvested Russian profits from crude will increasingly fuel domestic growth, lifting the likes of property company LSR Group (LSRG.Russia) and drug company Pharmstandard (PHST.Russia).
.
Yes, emerging markets always come with risks, from poor rule of law to inflation. Over the long term, however, these countries will likely regain their footing, and their stocks should climb nicely.
Inflation and rising interest rates in places like China and Turkey, among other emerging markets, has tempered investors' ardor for far-flung locales. Couple that with Middle East unrest and surprising U.S. economic strength this year, and it's no mystery why investment flows have moved away from developing markets.
The Standard & Poor's 500 index of big U.S. stocks has, since Aug. 31, logged roughly double the returns of most emerging markets, in dollar terms. Only Russia, with its stock market heavily tied to sharply rising oil prices, has done better.
.
Emerging-market stocks, however, should regain their strong form soon, thanks to the better long-term economic and profits growth expected in Brazil, India, Russia and China, the so-called BRIC nations. Turkey, South Africa and other up-and-comers could also prove strong. Developing countries' stocks have trounced the S&P 500 since 2005, with even the lowest returns exhibited, 64% by both Russia and Turkey, towering above the 12% in the U.S.
While each emerging market has its particular risks, the ground lost since the summer gives long-term investors some inexpensive entry points. Brazil, South Africa, Turkey and Russia offer some of the lowest valuations among developing countries. Stocks like Brazil's Petrobras (ticker: PBR) and Tractebel Energia (TBLEY), Turkey's Akbank (AKBTY) and South Africa's Sasol (SSL) could be propelled upward as their home markets recover.
..
..
A recovery will get support from receding negative factors, especially fears of rising interest rates. Investors have been fretting that commodity inflation, especially in food, will cause developing countries to forcefully tighten their monetary policies.
.
China's tightening came earlier and was more aggressive than expected, for example. But London-based Goldman Sachs strategist Sharon Bell says, "the early part of the tightening cycle is over in emerging markets, and growth momentum is likely to accelerate for the rest of the year."
Now, the risk of rising interest rates is shifting to the developed markets, Bell points out. Just last week the European Central Bank began hiking rates. And after years of easy money, higher U.S. interest rates are only a matter of time.
Investors have made a tactical shift to the U.S., notes Michael Gavin, Barclays Capital's head of emerging-markets strategy. But long-run fundamentals still favor emerging markets, he says, and by the time the U.S. begins raising rates—Barclays figures August 2012—the drama of emerging-market monetary tightening will have passed. Moreover, investors in U.S. stocks may anticipate a rate hike long before the Federal Reserve moves, putting pressure on the shares relatively soon.
A Turning of the Tide
Money has started flowing back to emerging markets. With many of the countries showing renewed strength, ETFs tied to their stocks look reasonably priced and set to climb. | 2011E | 2011E | Country | Total Return | ||
| Country/Index | EPS Growth | P/E | Mkt Value ($bil) | 2005-10* | ETF/Ticker |
| China/CSI 300 | 23% | 15 | $4,008 | 345% | iShares FTSE China 25/FXI |
| Brazil/Bovespa | 6 | 11 | 1,606 | 190 | iShares MSCI Brazil/EWZ |
| India/Bombay Stock Exchg | 13 | 15 | 1,589 | 135 | iShares S&P India Nifty 50/INDY |
| South Africa/FTSE/JSE 40 | 35 | 12 | 539 | 92 | iShares MSCI South Africa/EZA |
| Russia/RTSI | 45 | 7 | 785 | 64 | SPDR S&P Russia/RBL |
| Turkey/Istanbul Stock Exchg | 10 | 11 | 328 | 64 | iShares MSCI Turkey/TUR |
| S&P 500 Index | 7 | 14 | 16,555 | 12 | |
| *In U.S. dollars. Sources: Bloomberg; Thomson Financial | |||||
"Despite the more advanced tightening process in emerging markets, we still expect a healthy 7.4% gross domestic product growth in emerging markets this year," Bell says. "This compares to 2.2% for a developed market like Europe, for example." U.S. growth will be higher, but at around 3%, not by much.
ONE WAY TO PLAY THE RECOVERY in developing markets, according to Goldman Sachs, is the broad iShares MSCI Emerging Markets Index (EEM), an exchange-traded fund that, like many of the countries it represents, has underperformed. Another route: country-specific ETFs of Brazil, Turkey or South Africa, among others.
Technical market indicators also bode well for the developing world. Most importantly, global equity fund flows turned significantly positive in the last week of March, totaling $2.6 billion, the first big inflow since early January, according to research firm EPFR Global. Flows had steadily declined late last year and then went heavily negative in the first quarter, the worst for emerging-market flows since the third quarter of 2008.
.
At the same time, Indian, Russian, Brazilian, and Turkish indexes are all showing important moves above their 50-day or 200-day moving averages, according to data from Strategas and Auerbach Grayson. Broadly speaking, emerging-market indexes have firmed up over the past few weeks, notes Christopher Verrone, a Strategas analyst, and certain bellwether stocks show improved trading patterns.
.
One of those is Brazilian energy giant Petrobras, whose shares have broken above the 50-day and 200-day moving average. That bodes well for the country's Bovespa index, given that Petrobas accounts for more than 10% of its value. Petrobras' expected production growth rivals the oil majors and its shares trade at the relatively inexpensive price to earnings ratio of 10 times consensus analyst earnings per share estimates for 2012, while EPS is seen growing 9%.
.
Some canny money managers already are returning to emerging markets. Jacob de Tusch-Lec, a fund manager with Artemis Investment Management, has been buying Akbank, Turkey's most prominent bank.
.
"I'm willing to go through cyclical inflation for the secular long term, he says. Akbank is generally disliked by analysts, a bullish contrarian sign. It sports a strong balance sheet, a 2012 price-to-earnings ratio of 11 and likely EPS growth of 10% or better.
.
After shedding all his emerging-market exposure last fall, Alan Miller, a money manager at London based SCM Private, recently bought the iShares MSCI Turkey ETF (TUR). Inflation is an issue in Turkey but the central bank there appears to be ahead of the curve.
SCM is attracted by strong economic growth in Turkey, favorable demographics, the valuation of its largest equities— typically less than 10 times this year's earnings—and double-digit profit growth.
Brazilian power company Tractebel Energia also looks promising. As a utility it's a defensive asset, de Tusch-Lee notes, but it also is growing much faster than a developed market utility; analysts expect EPS to rise 16% next year. The stock is trading at less than 12 times next year's expected earnings.
.
The Bottom Line
.
The economies of developing nations big and small look ready to grow at a nice clip, lifting stocks like Brazil's Petrobras. A broad range of ETFs also could shine..
South Africa's Sasol is in technological class by itself. It's one of the few large publicly traded companies that turns natural gas and coal into petrochemicals like diesel fuel. Thanks to abundant shale gas around the world, costs are low. Sasol trades at nine times EPS estimates for the year ending June 2012, and profit growth could hit 25%.
.
Russia, for its part, is a special case. It's dominated by huge energy companies, and is essentially a proxy for oil prices. John Derrick, a co-manager of U.S. Global Investors Eastern European fund (EUROX) says reinvested Russian profits from crude will increasingly fuel domestic growth, lifting the likes of property company LSR Group (LSRG.Russia) and drug company Pharmstandard (PHST.Russia).
.
Yes, emerging markets always come with risks, from poor rule of law to inflation. Over the long term, however, these countries will likely regain their footing, and their stocks should climb nicely.
0 comments:
Publicar un comentario