Are emerging markets a bargain or yet another proverbial falling knife?
More bargain-hunters are starting to appear. Today Barclays equity strategists Dennis Jose, Ian Scott and Joao Toniato went so far as to recommend buying Russia’s Gazprom and Sberbank (along with China Shipping Development Co) to gain EM exposure.
Could emerging markets be the most-disliked region currently? They have been punished by investors, underperforming developed market equities by nearly 35% since Nov 2010, considerably worse than what would be suggested by their earnings (Figure 2). Amongst sellside analysts, a Bloomberg poll seems to indicate that few research houses recommend an
overweight on EM equities. From our meetings as well, we find most investors have little sympathy for our recent call to overweight EM equities
A few rather nice Barclays valuation charts after the break, plus some caution.
Quite a few people seem to dislike a column I wrote earlier this week on exchange-traded funds and their role in the emerging market sell-off. So let me offer a little extra data that was not in the earlier piece.
The following chart, compiled from Strategic Insight Simfund data, shows total inflows and outflows from US investors to emerging market equity funds of three types: active funds, indexed open-ended funds, and indexed ETFs. Figures are in billions of dollars. Starting in 2009, when emerging markets began their rebound, and going through to the final quarter of last year, I believe the story it tells could not be much clearer: ETF money is flighty.
Money in ETFs is far more volatile and far more prone to exit in a hurry than money invested in emerging markets through other vehicles. As EM investing is supposed to be a game for the long term, this is a problem. Read more
It’s easy to get the impression from the media that a new emerging market crisis is upon us. I wouldn’t rule it out, but so far what we’ve seen barely counts as a crisis even in countries such as Turkey, hit the hardest.
Turkey is having some serious political problems and this week hiked overnight interest rates from 7.75 to 12 per cent at a midnight emergency meeting. It looks bad, but in the context of Turkey’s history, this is mere noise. Turkey’s last coup was in 1997 – the “postmodern coup” – and there had been one each decade since 1960. The unusual thing is that the military went throughout the 2000s without taking charge.
Here’s the long view on Turkish interest rates (note this is the overnight borrowing rate, the longest-running of the multiple Turkish rates; it is no longer the main rate, but was more than doubled from 3.5 to 8 per cent this week):
Old stock market wisdom has it that as goes January, so goes the year. As with “sell in May”, “run your winners” and so many others, there is some truth in the saying: in 62 of the last 85 years the US market has moved the same direction in January as in the full year ahead.
On the other hand, the first day of trade is irrelevant, as Howard Silverblatt at S&P Dow Jones Indices points out. Read more
Russell Napier’s Anatomy of the Bear seems to be quite a cult classic among investors. I regularly see it on portfolio managers’ desks. Meanwhile, his video interviews with the FT in the years since the crisis also seem to have created quite a cult following. This week he completed his fourth interview with us since 1999, and he is sticking to his claim, based on historical experience, that the S&P 500 will need to slide down below 500 once more before this bear market is over (he did say 400 in the book).
How much has his story changed, and how seriously should we take him? This obviously divides opinion. So here are his previous interviews with us, in chronological order. Read more
1997 was not a great year for music lovers. True, Daft Punk burst on to the English speaking world (or at least the British top 10), and Texas, Blur and Jamiroquai were all going strong, but March alone saw Ant & Dec, Boyzone, Wet Wet Wet and the Spice Girls all near the top of the charts.
It was a far worse year for emerging markets investors, and one which is now being resurrected for comparisons like a bad best-of album. Back then, EM investors lost their shirts, and now some are losing them again, as the US Federal Reserve talks about “tapering” its bond purchases.
First, a chart for those who doubt the impact of the taper: this shows shares for each Asian emerging market, with the grey bars showing the weekly rise or fall in Treasury yields (treat this as indicative: I left off the bond yield axis as it was already looking pretty confusing).
Okay, not quite. But the current account tells you most of what you need to know. Since May, emerging countries which need to attract international capital – those with current account deficits – have seen their currencies and share prices slide and their bond yields jump. Those with a surplus have been hit much less hard.
John Authers has put up a nice chart from HSBC showing this for equities already. This chart from Keith Fray (usually on the FT Data blog) shows the close link between rising yields and a current account deficit (the outlier in the bottom left is Chile, running a current account deficit but a massive government surplus). Read more
While the US Treasury bond sell-off goes on, the market’s sorting of emerging markets is brutal. One factor matters above all others: does the country have a current account surplus or deficit? In other words, does it need to attract foreign capital or not?
The following chart was produced by John Lomax, emerging market equity strategist at HSBC. Since tapering talk began in May, it shows that emerging markets have been bifurcated. Those with a surplus prosper, those with a deficit sell off. This is how shares in the two classes of countries have performed this year, relative to the MSCI emerging markets index: Read more
Can CAPE guide us around the world? One reasonable complaint during the last week’s debate on cyclically adjusted price/earnings multiples is that the discussion is too US-centric. There are reasons for this. The US is still by far the world’s biggest stock market, the data are more reliable and go back further, and most of the academic players in the debate are based in the US. But it is still a reasonable complaint.
Here then are the results of the exercise in using multiples of 10-year rolling average earnings to value a range of world markets, as carried out by Mebane Faber of Cambria Investment Management, who kindly gave me his data. One huge caveat is that the data do not go as far back as for the US (although this at least means that we do not need to have arguments about whether it is possible to make comparisons with earnings from the late 19th century). The Faber data for the UK go back to 1927; none of the others go back further than 1969; and for some of the emerging markets the data only go back to the 1990s. The full details can be found on this post, and Mr Faber provided me with updated results to the end of July this year. Read more
One of the biggest arguments for emerging markets during their bull market, which started in 2003, was about “decoupling”. The idea was that the emerging markets had now managed to decouple from the developed world, and would be impervious to a recession there. It never worked as it was supposed to, with the arguable exception of a few hectic months at the end of 2008 when China’s stimulus appeared to end. Now, I’d argue, the decoupling has ended, but not in a good way.
I discussed emerging markets with Barclays’ Larry Kantor in a Note video. That included the following chart, which shows that emerging markets have now underperformed the developed world over the last five years, a period that starts roughly with the crisis over Fannie Mae and Freddie Mac in the hot summer of 2008:
Significant EM underperformance when developed markets were performing well is a new experience for many currently operating in the markets. More detail (and charts) after the break. Read more