Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Blueprint Medicines - BPMC - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 27th Sep 21
China, India: Richer or Poorer? The Asian Pacific Financial Markets Forecast - 27th Sep 21
Stock Market Bubble Valuations Dot Com 2000 vs 2021 - 27th Sep 21
Gold When the Tight Economic Rope Slackens - 27th Sep 21
The U.S. Government Plans to Default on Debt the Dishonest Way - 27th Sep 21
Stock Market Retest of the High? - 27th Sep 21
Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
Will Biden’s Neo-Populist Economic Doctrine Support Gold? - 25th Sep 21
Markets Deflationary Winds Howling - 25th Sep 21
Crude Oil Price Piercing the Sky: Where Will We See the Black Gold by Xmas? - 25th Sep 21
Cryptocurrency policy choices and consequences - 25th Sep 21
The Next Emma Raducanu UK Tennis Star Pleasing the Crowds at Millhouses Park Sheffield - 25th Sep 21
Stock Market Rescued by the Fed Again? - 24th Sep 21
Are Amazon Best Cheap Memory Foam Mattresses Any good? Bedzonline £69 4ft Small Double ECO Example - 24th Sep 21
Evergrande not a Minsky Moment - 24th Sep 21
UK Energy Firms Scamming Customers Out of Their Best Fixed Rate Gas Tariffs - 23rd Sep 21
Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Should School Children be Jabbed with Pfizer Covid-19 Vaccine To Foster Herd Immunity? - UK - 23rd Sep 21
HOW TO SAVE MONEY ON CAR INSURANCE - 23rd Sep 21
Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
Trading Crude Oil ETFs in Foreign Currencies: What to Focus On - 22nd Sep 21
URGENT - Crypto-trader event - 'Bitcoin... back to $65,000?' - 22nd Sep 21
Stock Market Time to Buy the Dip? - 22nd Sep 21
US Dollar Bears Are Fresh Out of Honey Pots - 22nd Sep 21
MetaTrader 5 Features Every Trader Should Know - 22nd Sep 21
Evergrande China's Lehman's Moment, Tip of the Ice Berg in Financial Crisis 2.0 - 21st Sep 21
The Fed Is Playing The Biggest Game Of Chicken In History - 21st Sep 21
Focus on Stock Market Short-term Cycle - 21st Sep 21
Lands End Cornwall In VR360 - UK Holidays, Staycations - 21st Sep 21
Stock Market FOMO Hits September CRASH Brick Wall - Dow Trend Forecast 2021 Review - 20th Sep 21
Two Huge, Overlooked Drains on Global Silver Supplies - 20th Sep 21
Gold gets hammered but Copper fails to seize the moment - 20th Sep 21
New arms race and nuclear risks could spell End to the Asian Century - 20th Sep 21
Stock Market FOMO Hits September Brick Wall - Dow Trend Forecast 2021 Review - 19th Sep 21
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Emerging Markets Crash Presents Compelling Valuations But with Risks

Stock-Markets / Emerging Markets Oct 28, 2008 - 01:06 PM GMT

By: Frank_Holmes

Stock-Markets Best Financial Markets Analysis ArticleJack Dzierwa writes:After years of outsized performance, global emerging markets have been battered by volatility this year. All of the constituents in the MSCI Emerging Markets Index are down in 2008, with stock markets in Russia , Hong Kong , India and other countries losing more than 50 percent of their value.


While pessimism and fear currently dominate, it's important to keep a clear eye on company fundamentals because they will ultimately emerge as the driving force of market direction. Of course, we can't be sure when this will take place, but we do see some positive signs for emerging markets.

In terms of valuation, since 1992 emerging market stocks have traded at an average trailing P/E multiple of around 15x. That ratio is now approaching 8x, a record low. For the sake of comparison, the ratio was around 12x during the emerging markets crisis following the Russian default in 1998, and the ratio was around 10x after the collapse of the Internet bubble a couple of years later.

If history is a guide, this re-rating represents an opportunity for long-term investors. Using data since 1992, the table below illustrates the potential for an upswing in the emerging markets when the valuation multiple falls 10 percent below the long-term mean (a trailing multiple of 13.5x or less). Against this background, the current valuation level is even more compelling.

Furthermore, the fiscal condition of the major emerging markets has improved since 1992. A good indicator has been the dramatic growth in foreign reserves, as shown in the chart below for the BRIC countries ( Brazil , Russia , India and China ) in recent years. Other macroeconomic data support this idea. These countries feature healthy GDP growth, positive trade balances, smaller budget deficits and lower inflation.

So what will it take to boost emerging market valuations from the current level?

Clearly, the volatility in developed markets (elevated by recent margin calls related to the credit crisis) needs to subside to restore order and enhance investor confidence. The correlations between developed and emerging markets have increased significantly in the past decade.

In addition, inflationary pressure will be a critical driver. Inflation has been a vulnerability of many emerging markets in the last two years. There's an inverse relationship between inflation (measured by CPI) and stock valuations, as shown in the chart below. Many economists believe that inflationary expectations have peaked, which if true should be positive for valuations.

Lower oil and food prices should contribute to easing inflation, although the final outcome will vary from country to country and will depend on the impact of the latest volatility in the exchange rates. The overall trend in recent months has been favorable.

Government actions are also worth watching. Just this week, for instance, China moved to boost its housing sector by cutting both mortgage rates and the down payments required to buy a home, and India 's central bank made a significant interest rate cut aimed at stimulating Asia 's third-largest economy.

Another variable is the volatility in foreign exchange markets, which is especially problematic for emerging-market companies that borrowed in U.S. dollars expecting continued strength of their domestic currencies only to see massive depreciation in recent weeks.

The Polish zloty has lost nearly 50 percent against the dollar since July, while Brazil 's real fell 47 percent and the Mexican peso 35 percent in roughly the same period. Currency depreciation is good news for exporters, although those dependent on commodity exports face lower prices for their products.

There is increasing evidence that some corporations will not survive if they have made imprudent bets on exchange rates. Retail borrowers are already feeling the pinch of servicing foreign currency-denominated debt, and the result could be rising defaults that threaten banks in those countries.

This is a real risk that will vary from company to company and from country to country. In the current environment, however, it appears that when anything ‘suspicious' occurs, investors sell positions indiscriminately.

Many near-term uncertainties may roil emerging markets, but the long-term fundamentals remain intact. At some point, valuations will again be valued by investors. When that happens, we see significant upside potential in emerging markets.

By Jack Dzierwa

Jack Dzierwa is global strategist at U.S. Global Investors and co-manager of the Global MegaTrends Fund (MEGAX).

More timely commentary from Frank Holmes is available in his investment blog, “Frank Talk”: www.usfunds.com/franktalk .

Please consider carefully the fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Gold funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in gold or gold stocks. The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 12-31-07 : streetTRACKS Gold Trust.

Frank Holmes Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in