Monday, February 24, 2014

Emerging Markets Are Cheap For a Reason (excerpt)

So are emerging markets likely to underperform or outperform this year? Consider the following:

(1) Growing. Markit released January’s HSBC Emerging Markets Composite PMI on February 10. Despite all the unsettling headline news about EMs, the index remained above 50.0 at 51.4, down slightly from December’s 51.6 and the sixth consecutive reading above 50.0. The press release noted that manufacturing remained stronger than services.

(2) Lagging. The Emerging Markets MSCI (in dollars) has been underperforming the All Country World MSCI since their October 2011 lows. Since then, the former is up only 15.4%, while the latter is up 54.4%.

(3) Cheapening. The underperformance of the EM MSCI since the summer of 2011 is largely attributable to its forward P/E, which has been moving sideways around 10.0. Over the same period, the World P/E is up more than 30% (to 13.9), led by a 50% increase in the US (to 15.3).

(4) Flat-lining. The EM MSCI stock price index also has been moving sideways with some volatility since the summer of 2011, along with both the CRB raw industrials spot price index and the price of a barrel of Brent crude oil. The close relationship between these three variables suggests that the EM MSCI is likely to continue underperforming as long as commodity prices remain flat. That’s the most likely outlook this year if global economic growth remains subdued, as I expect.

Today's Morning Briefing: Flash Correction. (1) The rules of the game. (2) Mark to Markit. (3) Flashy and not-so-flashy M-PMIs of the month. (4) Accentuating the positives again. (5) Blaming the moon and the weather. (6) Regional surveys remained frozen. (7) Quick roundtrip for P/Es. (8) Melt-up is still on the table. (9) Discount traders are back in size. (10) A shortage of stock. (11) EMs are cheap, but may continue to underperform as they have since mid-2011. (12) “The Monuments Men” (- - -). (More for subscribers.)

No comments: