New York: Brazil’s annual inflation averaged more than 1,000% in the 1990s, South Korea needed a $57 billion (Rs2.28 trillion then) bailout from the International Monetary Fund (IMF), and Poland went through nine prime ministers.
Now, investors say emerging markets are just as stable as the US, Europe and Japan, and deserve a premium because their economies are growing three times as fast. Stocks in developing nations traded this month at 15.2 times estimated profit, versus 14.9 times for equities in industrialized countries, Bloomberg data
shows. In 2005, the ratios were 8.45 and 17.3, respectively.
Developing interest:Marc Faber, publisher of the “Gloom, Boom and Doom” report, says that although China and India are expanding rapidly, their valuations are not very compelling at the moment.
The shift has given Brazil’sBanco Bradesco SA a higher valuation than Citigroup Inc., and has made South Korean steel maker Posco pricier than its German rival ThyssenKrupp AG. Indian, Peruvian, Czech stocks all fell less than those in the US and Western Europe in the latest global sell-off.
Developing countries account for more than half of the world’s estimated 5.2% economic growth this year, and $5.68 trillion of foreign currency reserves, according to IMF and Bloomberg data. Inflation in Brazil has dropped to less than 4%, and South Korea is now a net creditor.
The changes aren’t enough to warrant the prices emerging-market stocks are commanding, said Gloom, Boom & Doom Report’s Marc Faber.
Developing nations’ shares have outperformed developed markets for six straight years. “Every Tom, Dick and Harry in the world knows that China is growing at 9-11%, that India is expanding rapidly,” Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd, said in Vancouver. “But the valuations are not very compelling at the moment.”
The rise in emerging market valuations shows that investors believe there is less risk to their earnings, said Allan Conway, the London-based head of emerging-market equities at Schroders Plc., which oversees $276 billion.
Governments have built up currency reserves and cut debt, insulating emerging-market firms from shocks that have depressed valuations in the past. “This idea, ‘sell risky assets, sell emerging’, is complete nonsense,” said Conway. “They are not risky assets. That’s a sentiment view and it’s a view of times gone by. It is not a view for today.”
The Morgan Stanley Capital International (MSCI) Emerging Markets Index will eventually rebound from the 10% decline it has suffered after reaching a record on 23 July, and will beat developed markets, according to Conway.
Since global stocks peaked on 13 July, the Standard & Poor’s 500 Index dropped 6.4%, and the Dow Jones Stoxx 600 Index of European shares lost 9.8% in dollar terms. India, Peru and the Czech Republic fell between 3.1% and 6.3%.
Less developed economies have a combined $484 billion in current account surpluses, compared with deficits of $81 billion in 1997, data compiled by IMF showed.
Foreign currency reserves grew by almost 500% to $3.87 trillion in the last 10 years, according to Roubini Global Economics Llc., the research firm of Nouriel Roubini, a professor at New York University’s Stern School of Business.
Government debt totals 39% of gross domestic product in emerging markets, compared with 89% for developed nations, according to Schroders.
“Emerging countries, by and large, are stockpiling either trade dollars or petrodollars, in such a degree that they’ve taken the financial risk way down,” said James Swanson, who helps oversee $200 billion as chief investment strategist at MFS Investment Management in Boston.
China, Russia and India will account for half of the world’s economic growth this year, IMF had said last month. Developing countries are forecast to expand at 8%, compared with 2.6% for advanced economies, the fund had said in July.
The Washington-based fund boosted its 2007 growth forecast for China, the most for any country, raising it 1.2 percentage points to 11.2%. The Russian economy is also beating forecasts and is set to grow 7% this year, more than the 6.4% predicted in April. For the US, IMF trimmed its growth forecast to 2% from 2.2%.
“In the past, you wanted a PE (private equity) discount and needed a risk premium because the economic fundamentals were worse,” said Conway. “Because that’s changed, there should be a switch around. The price you pay for the growth you’re getting is far more attractive in emerging markets.”
Two years ago, the MSCI Emerging Markets Index traded at a 51% discount to the MSCI World Index of 23 developed markets. The discount has narrowed to 1.4% this month. On the basis of estimated earnings for the next year, emerging markets traded at a 1.6% premium to developed countries this month. That would mark the first time emerging markets are more expensive than developed nations since March 2000, if analysts’ earnings estimates prove correct.
For Brazilian stocks, the discount narrowed to 15%—from 43% two years ago—as their price-to-earnings (P-E) ratio rose to 13.4 from 9.8. Investors are also paying as much for earnings of South Korean firms as they are for those in developed markets, after demanding a 47% discount in 2005.
Pohang, South Korea-based Posco, Asia’s third biggest steel maker, trades at 11.6 times profit, up from 4.57 two years ago. The ratio for Dusseldorf-based ThyssenKrupp, Germany’s largest steel maker, rose to 8.94 from 7.1. Osasco, Brazil-based Bradesco, Brazil’s second biggest non-state bank, is valued at 16.8 times earnings, from 10.5 two years ago. Citigroup, the biggest US bank trades at 10.4 times earnings.
Citigroup’s P-E ratio has dropped from 13.2 at the start of the year on growing concern subprime mortgage losses would curb the earnings of banks and brokerages.
“Whenever the US financial markets catch a cold, emerging markets essentially get a very serious case of pneumonia, that’s one of the key assumptions that maybe we may need to reconsider,” director of Lauder Institute at the University of Pennsylvania’s Wharton School in Philadelphia Mauro Guillen said.