New York: The biggest slide in emerging market stock valuations in a year and a half is proving that a slowdown in the US economy still matters to Brazil, Russia, India and China, the so-called Bric countries.
Shares in the MSCI Emerging Markets Index dropped 12% relative to profit this month as the prospect of a US recession pushed two-thirds of the world’s equity indexes into bear markets. The last monthly decline as steep was in May 2006, according to data compiled by Bloomberg. Even the price-earnings (P-E) multiple for the Standard and Poor’s 500 Index, the benchmark for US stocks, didn’t fall as much.
Losing ground: People pass a PetroChina gas station in Shanghai.
Companies such as PetroChina Co., China’s biggest oil producer, and Russia’s OAO Lukoil show the threat of a global slump is shaking the confidence of investors who viewed developing countries as a haven from the US. PetroChina’s 44% plummet since November erased about $400 billion (Rs15.75 trillion), more than the market value of Microsoft Corp., the No. 1 software maker. Russian stocks are headed for their biggest loss in 19 months after money managers bought an unprecedented amount in 2007.
“The only way they could decouple would be for them to be on another planet,” said David Dreman, who oversees $20 billion as chief investment officer at Jersey City, New Jersey-based Dreman Value Management Llc. “We are the biggest buyer of their products and biggest user of their services, so if our economy slows down, their growth rate has to slow down.”
The MSCI index rose to an all-time high in October on expectations economic growth in the so-called Bric countries, which accounted for half the world’s expansion last year, would shield stocks even if the US stumbled. Last year’s surge pushed the valuation for the MSCI above the S&P 500 for the first time since the Internet bubble burst in March 2000. Investors were willing to risk capital on profit growth in developing markets as their governments boosted currency reserves and cut debt.
Now, the P-E multiple is 15.35, down from 17.44 at the end of last year and an all-time high of 90.6 in February 1999, Bloomberg data show. Investors pulled a record $10.7 billion from emerging market stock funds last week, according to data compiled by Cambridge, Massachusetts-based research firm EPFR Global.
The International Monetary Fund in October forecast economic growth of 7.4% this year in developing countries and 1.9% in the US. Four months later, Quincy Krosby, chief investment strategist at the Hartford, is less optimistic as economists at Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch and Co. predict the US will enter a recession this year, if it’s not already in one.
“Emerging markets are not immune from a slowdown,” said Krosby, who helps manage $330 billion in Hartford, Connecticut and told clients to reduce holdings in developing countries in the second quarter of 2007 because of signs the US economy was slowing. “Even if the market comes back and we get a nice bounce back up, I’d still take money off the table.”
Predictions of a contraction in the US pushed 46 of the world’s 67 largest indexes down to at least 20% below their previous highs as of last week, qualifying the markets as bear. The price-earnings multiple of the S&P 500 fell to 17.80 from 18.51 this month as the index dropped 9.5 %.
Beijing-based PetroChina, the world’s largest company by market value, has been among the hardest-hit as investors, including Berkshire Hathaway Inc., abandoned the stock last year. A week after selling the stake, Warren Buffett, Berkshire’s billionaire chairman, told reporters that Chinese stocks had risen too fast. The P-E multiple for PetroChina’s shares tumbled 43% from a record high in November to 13.7 last week.
India’s largest software exporter Tata Consultancy Services Ltd fell 22% this month on concern its biggest customers, US banks, would scale back orders, Mihir Vora, who helps manage about $734 million at HSBC Asset Management (India) Pvt. in Mumbai, had said earlier this month. The company reported the slowest quarterly profit growth in two years on 16 January. The stock has fallen 11% since then, making it the cheapest versus earnings last week than any time since its initial public offering in August 2004.
Shares of PetroChina closed at HK$11.24, up 0.4%, in Hongkong on Tuesday. TCS closed at Rs863.25 on the Bombay Stock Exchange, up 1.06% over Monday’s close of Rs854.2.
The assumption that “there is a very strong dependency between the Brics and the US economy could have a stronger impact on stock-market pricing than the actual ties,” said DWS Investment GmbH’s Andreas Gummich. “Brics are not quite a safe haven.”
Nick Baker, Nan Wu and Jeff Kearns in New York, Alexander Ragir in Rio de Janeiro, Shailendra Bhatnagar in New Delhi, William Mauldin in Moscow and Chua Kong Ho in Shanghai contributed to this story.