It’s generally accepted these days that emerging equities are cheap and that value-focused investors should consider buying. But some disagree — analysts at UBS say the alleged cheapness of EM equities rings hollow when you look at the return-on-equity on emerging companies. They don’t dispute that the market has de-rated significantly on price-earnings and price-book metrics (at 10.5 times and 1.5 times respectively, they are well below long-term averages). But they argue that these have not been excessive when compared to the decline in profitability. Emerging return-on-equity pre-crisis was usually higher than developed. Once at a lofty 17 percent, emerging ROE now languishes at 12.7 percent, almost on par with ROE for developed companies. Check out this graphic:
Multiples in EM have de-rated in only lock step with the de-rating in margins and RoEs relative to the developed world (UBS write)
LONDON, Nov 8 (Reuters) – Greece’s leading companies are set
for a multi-billion-dollar boost in stock market value as a
result of their inclusion in MSCI’s flagship emerging market
index, improving their appeal to investors as they struggle in a
Ten Greek companies will enter MSCI’s Emerging Markets index
on Nov. 27, the index provider said on Thursday. The
Greek bourse had already been surging in heavy volume as
international investors took a fresh look at a country whose
debt crisis hammered asset values.
As in many countries with memories of hyperinflation and currency collapse, Turkey’s middle class have tended to hold at least part of their savings in hard currency. But unlike in Russia and Argentina, Turkish savers’ propensity to save in dollars has on occasion proved helpful to companies and the central bank. That’s because many Turks, rather than just accumulating dollars, have evolved into savvy players of exchange rate swings and often use sharp falls in the lira to sell their dollars and buy back the local currency. Hence Turks’ hard currency bank deposits, estimated at between $70-$100 billion – on a par with central bank reserves — have acted as a buffer of sorts, stabilising the lira when it falls past a certain level.
But back in 2011, when the lira was in the eye of another emerging markets storm, we noticed how some Turks had become strangely reluctant to sell dollars. And during this year’s bout of lira weakness too, Turkish savers have not stepped up to help out the central bank, research by Barclays finds. Instead they are accumulating dollars — “rather than being contrarian, their behaviour now seems aligned with global capital flows,” Barclays analysts write. While the lira has weakened to record lows this year, data from UBS shows that the dollarisation ratio, the percentage of bank deposits in foreign currency, has actually crept up to 37.6 percent from 34.5 percent at the start of the year. Here’s a Barclays graphic that illustrates the shift.
LONDON, Nov 6 (Reuters) – Russian and Turkish local currency
bonds may receive billions of dollars in capital inflows after
their inclusion into a flagship global index, a vote of
confidence for markets that are just recovering from a bruising
Being part of a widely-used index tends to bring in cash
because investment funds tracking the index will have to make
room in their portfolios for the bond or stock in question.
Investors in emerging markets are facing a tough choice. Should one buy cheap shares in the hope that poor corporate governance and profitability will improve some day? Or is it better to close one’s eyes and buy into expensively valued companies that sell mobile telephones, holidays and handbags — all the things high-spending emerging market consumers hanker after?
At the moment, investors are plumping for the latter, growth-at-any price investment strategy. Result: a lopsided emerging equity index in which consumer discretionary shares are up more than 5 percent this year, energy shares have lost 7 percent while MSCI’s benchmark emerging equity index is down 3 percent.
Many investors have greeted with enthusiasm India’s plans to get its debt included in international indices such as those run by JPMorgan and Barclays. JPM’s local debt indices, known as the GBI-EM, were tracked by almost $200 billion at the end of 2012. So even very small weightings in such indices will give India a welcome slice of investment from funds tracking them.
At present India has a $30 billion cap on the volume of rupee bonds that foreign institutional investors can buy, a tiny proportion of the market. Barclays analysts calculate that Indian rupee bonds could comprise up to a tenth of various market capitalisation-based local-currency bond indices. That implies potential flows of $20 billion in the first six months after inclusion, they say — equivalent to India’s latest quarterly current account deficit. After that, a $10 billion annual inflow is realistic, according to Barclays. Another bank, Standard Chartered, estimates $20-$40 billion could flow in as a result of index inclusion.
Emerging stocks, in the doghouse for months and months, haven’t done too badly of late. The main EM index, has rallied more than 11 percent since its end-August troughs, outgunning the S&P 500′s 3 percent rise in this period. Bank of America/Merrill Lynch strategist Michael Hartnett reminds us of the extreme underweight positioning in emerging stocks last month, as revealed by his bank’s monthly investor survey. Anyone putting on a long EM-short UK equities trade back then would have been in the money with returns of 540 basis points, he says.
Undoubtedly, the postponement of the Fed taper is the main reason for the rally. Another big inducement is that valuations look very cheap (forward P/E is around 9.9 versus a 10-year average of 10.8) .
LONDON (Reuters) – It will be a jittery 18 months for Ukraine’s international creditors, who are weighing up its $60 billion-plus debt repayment schedule against its fast-diminishing hard currency reserves.
Ukraine’s presidential election in early 2015 is the focus for investors, who reckon the government will then be willing to sign up to a desperately needed loan from the International Monetary Fund. Before that, though, it would prefer to scrape by rather than accede to the IMF’s politically difficult demands.
China’s slowing economy is raising concern about the potential spillovers beyond its shores, in particular the impact on other emerging markets. Because developing countries have over the past decade significantly boosted exports to China to offset slow growth in the West and Japan, these countries are unquestionably vulnerable to a Chinese slowdown. But how big will the hit be?
Goldman Sachs analysts have crunched the numbers to show which markets and regions could be hardest hit. On the face of it non-Japan Asia should be most worried — exports to China account for almost 3 percent of GDP while in Latin America it is 2 percent and in emerging Europe, Middle East and Africa (CEEMEA) it is just 1.1 percent, their data shows.
LONDON (Reuters) – After a stormy year for global emerging markets, one long-term casualty may be the decade-long push for central banking free from politics and the inflation-busting kudos that earned.
Investors see governments once more intent on pumping up economic growth via low interest rates even at the risk of inflation and currency volatility.