Emerging Markets Showing Mature Markets a Clean Pair of Heels
I posted a table yesterday showing the public-debt situation of emerging vs mature countries. "The contrast is staggering ... This trend [of escalating debt in mature markets and declining debt in emerging countries] represents a major reversal from the past, when investors in developing economies often had to factor in large sovereign debt, high default risk and wildly fluctuating currencies. Government policy changes have contributed greatly to stronger economic fundamentals in many emerging nations, while policy moves by governments have been a source of weakness and uncertainty in the developed world," said the commentary.
It comes as no surprise that the MSCI Emerging Markets Index has been solidly outperforming the Dow Jones World Index since the low of October 2008, as seen in the relative strength chart below (a rising line indicates outperformance by emerging markets and a declining trend the opposite).
Source: StockCharts.com
But not only are public-debt levels low, company debt-to-equity levels of emerging-market companies are also low and heading lower - UBS predicts a decline to 22% in 2010 from 28% this year (via U.S. Global Investors). UBS also sees an increase in sales growth of 15% and 10% for 2010 and 2011 respectively, translating into a 34% jump in earnings this year and 12% in 2011.
Furthermore, when considering valuations emerging-market stocks appear reasonably priced. "The MSCI Emerging Markets Index has a 12-month forward price-to-earnings ratio of 10.8, which is 15% below the P/E for the MSCI World Index. As shown below, this valuation has rarely been more attractive - it is 15% below the long-term average," said U.S. Global Investors.
Source: U.S.
Global Investors - Weekly Investor Alert, July 16, 2010.
As said yesterday, investors could do a lot worse than bargain on the outperformance of emerging-market companies vs their slow-growing counterparts in mature economies for a number of years to come.
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
Copyright © 2008-2012 Dr Prieur du Plessis
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