Is It A Good Option To Bet On The Emerging Markets?

Posted On The UK Telegraph: Emerging markets second wind blows in the face of short-term thinking

Here is a snippet of what's written..

• ...Perhaps not surprisingly, given the uncanny ability of many investors to buy high and sell low, that gloom marked a turning point. My observation that emerging market investors had given up hope along with half the value of their portfolios came within days of the start of a new bull market for these riskiest of assets. The MSCI Emerging Markets index bottomed out on October 27, and since then it has risen by 50pc.
  
  As investors have rediscovered their appetite for chasing returns in far-flung places, some markets have done considerably better than this. Brazil's Bovespa index is up more than 70pc since its October low, while Russia's RTS index has very nearly doubled since January. The oil price has risen by two thirds since Christmas Eve. The FTSE 100, by contrast, is up just 8pc since October. America's S&P 500 stands at the same level it did six months ago.
  
  A couple of weeks ago, emerging market investment funds had one of their best ever weeks, taking $4bn (£2.6bn) of new money. Since November more than $10bn has flowed into these funds compared with almost $50bn heading the other way out of developed market funds. "De-coupling", a vogue investment term a year ago but dismissed as wishful thinking six months later, is back in fashion.
  
  Three factors have driven this sentiment yo-yo. First, the Chinese government announced a massive 4,000bn yuan (£400bn) stimulus package in November, which fuelled hopes that other emerging market exporters could switch their attention from the cash-strapped West to the world's new consumer of last resort. Twenty years ago, two thirds of emerging market exports were to developed countries. Now about half goes to other emerging markets.
  
  Second, investors started to believe that Asia's banks were less exposed to toxic assets and so less vulnerable to nationalisation. More broadly, the high savings rates and government surpluses in the region suggested that emerging markets were actually a safer long-term bet than developed markets.
  
  Third, investors reacted to early signs that the worst of the global recession might be over by switching from safe but over-priced assets (such as government bonds) to risky but potentially rewarding investments like emerging market equities and commodities. The price of copper, a bellwether of global economic growth, rose by 40pc in the first three months of 2009.
  
  Can the rise continue? Overall, emerging markets don't look over-priced, having fallen from an average of 18 times earnings a year ago to just eight in October and about 11 today. But generalising about emerging market investments is dangerous when the outlooks for the Baltic states and China, for example, are so different.
  
  The valuations of the hottest markets are starting to ring alarm bells. China's Shanghai Composite index trades on a price/earnings multiple of 30 today, three times as much as it did six months ago. Brazil's multiple has jumped from seven to 19 and its government is intervening in the currency markets to prevent the real from appreciating too quickly against the dollar.
  
  Proponents of the emerging markets story argue that companies operating in the developing world should trade at a premium because of the greater growth potential in these markets. Per capita incomes in these fast-growth parts of the world more than doubled between 2002 and 2007 compared with an increase of less than 40pc in developed markets. Economic growth in high single digits is expected in countries like China and India, compared with falls in the industrialised world this year and then a probably anaemic recovery as rising taxes and a long process of debt reduction holds back growth. Even so, today's valuations leave little wriggle room should growth disappoint in any way.
  
  Two clear lessons emerge from the recovery in emerging stock markets over the past six months. First, when all around you are reading the last rites for a region or asset class, your antennae should start twitching. The best time to buy is when it feels hardest to do so.
  
  Second, investors should ignore the short-term noise and back the long-term investment case. When I wrote about the abandonment of the emerging markets thesis six months ago I noted that "the IMF's latest World Economic Outlook forecasts growth in developing Asia of 7.7pc, with China a bit higher and India a bit lower. These are rates the rest of us can only dream of as we head into recession."