A few more warning shots over the bow of the emerging markets ship. Keep in mind P/E has become a very subjective topic - more important than any specific numbers are the comparative valuations. On one hand you should pay a premium for growth (which is completely lacking in much of the developed world), on the other hand you used to pay lower multiples for risk. But whose to say the systems of the US or UK should be considered any less risky anymore. Not with our financial innovation.
- The last time stocks in developing countries got this expensive was in October 2007, just before the MSCI Emerging Markets Index began a 12-month tumble that erased half its value.
- The MSCI gauge trades at 15.4 times reported earnings, compared with 14 for the Standard & Poor's 500 Index.
- Developing nations traded at a discount to American equities from 2001 to 2006 even after their economies expanded at almost three times the pace, according to Bloomberg and IMF data. They moved to a premium in October 2007, the peak of a five-year advance that sent the MSCI gauge up fivefold.
- Groupama Asset Management, Palatine Asset Management and Standard Life Investments say the disparity means investors are paying too much for shares from China to India to Brazil at a time when the global economy is contracting. MSCI's emerging- market gauge is valued at 1.7 times its companies' net assets after a 34 percent surge last quarter, the highest on record compared with the MSCI World Index of 23 advanced economies, which trades for 1.5 times, data compiled by Bloomberg show. Emerging-market stocks are at risk, said Matthieu Giuliani, a Paris-based fund manager at Palatine, which oversees $5.56 billion. You should only pay so much for growth.
- While developing nations' economies grew an average 1.7 times faster than developed countries in the past 20 years, their stocks traded at a discount because their economies and returns were more volatile.
- All 22 emerging-market currencies tracked by Bloomberg depreciated against the yen in the past month, and 16 weakened against the dollar. The yen usually attracts investors during economic turmoil because Japan's trade surplus makes the nation less reliant on overseas lenders, while the dollar benefits from its status as the world's reserve currency.
- Gains came too quickly in the context of a slow economic rebound, said Romain Boscher, who helps oversee $119 billion as a director at Groupama in Paris. Valuations are now high, and that leaves the door open for a drop. Emerging and developed markets are at risk.
- For Carmignac Gestion's Eric Le Coz, emerging-market equities deserve a premium because the economies are the only ones projected to grow this year. Financial institutions in developing nations also avoided most of the credit freeze that caused almost $1.5 trillion of writedowns and credit losses since 2007, according to Bloomberg data.
- Emerging markets should be more expensive, said Le Coz, who helps oversee $28 billion as a member of the investment committee at Carmignac in Paris. In the past, emerging markets were fragile. Today that's not the case.
So onto the question of decoupling which was a failed thesis in 2008. But try try again?
- Emerging markets are still dependent on exports and the health of wealthy countries, Palatine's Giuliani said. The European Union was the biggest export market for Brazil, Russia, India and China as of 2007, the last period the data were available, according to the Geneva-based World Trade Organization. The U.S. was the second-biggest market for Brazil, India and China.
- Shares in developing nations are the most vulnerable to further declines because prices have run too far ahead of a recovery in profits, according to Standard Life's Jason Hepner.