value

James Mackintosh

Value investors are getting excited about emerging markets again after their terrible performance over the past few months.

The problem, as Arjun Divecha, chairman of Boston’s GMO, says, is that mostly what’s cheap is commodity-related stocks set to suffer from the slowdown of demand in China. Domestically-oriented companies are down, but aren’t that cheap.

There are a couple of really cheap areas, though. He points to Russian oil shares, and Chinese banks.

Both have horrible fundamentals. Russia is stuck between recession-hit Europe and slowing China, and has some of the worst corporate governance in the world.

Chinese banks are directly exposed to the slowdown in the country’s economy, are being told to lend less (hurting profitability), face higher funding costs (hurting profitability) and risk the bursting of the credit bubble (which would expose the bad debts from their relaxed lending decisions of the past four years).

Given all that, shares would need to be very very cheap to consider buying them. And they are. Charts showing just how cheap Chinese stocks have become follow after the break. Read more