Monday, July 13, 2009

Emerging Markets Stocks Outperform: Signs Of A Top Or Of A New Dynamic?

Bloomberg's chart of the day shows how emerging markets have recently been outperforming the US S&P 500 in terms of weekly PE ratio.

Some notes from the article (all bold emphasis mine) including my comments in captions

-The MSCI emerging-market index had 13 bull-market rallies of at least 20 percent and 12 bear-market declines of the same magnitude since its inception in December 1987, according to data compiled by Birinyi Associates Inc., the Westport, Connecticut-based research and money management firm founded by Laszlo Birinyi. That compares with five bull markets and four bear markets for the S&P 500 during the same period.

(This implies that Emerging Markets stocks are more volatile than the developed market peers)

-The increase cut the dividend yield of the emerging-market gauge to 3 percent, compared with 3.5 percent for developed countries. MSCI’s emerging-market index fetches 1 times sales and 6.6 times cash flow, compared with 0.8 and 4.3 in the advanced gauge, data compiled by Bloomberg show.

(based financial ratios EM stocks seem more expensive, but financials don't tell the entire story)

-Developing nations’ share of global equity value climbed to an all-time high this month as investors poured in a record $26.5 billion last quarter, according to data compiled by Bloomberg and EPFR.

-The Washington-based IMF estimates developing economies will grow 1.5 percent as a group this year and 4.7 percent in 2010, while advanced economies will contract 3.8 percent in 2009 and expand 0.6 percent next year.

(And it won't be entirely a story of economic growth too)

-Developing nations traded at a discount to American equities from 2001 to 2006 even after their economies expanded at almost three times the pace, according to Bloomberg and IMF data. They moved to a premium in October 2007, the peak of a five-year advance that sent the MSCI gauge up fivefold. The index’s drop in 2008 was almost 16 percentage points steeper than the S&P 500’s 38 percent slide, the worst since 1937.

(the article suggests that when EM stocks outperform, a reversal looms)

-When emerging-market valuations climbed above the U.S. in 1999 and 2000, it foreshadowed the end of a seven-year global rally. The MSCI developing-nation index sank 37 percent in the 12 months after March 2000, compared with a 23 percent slide in the S&P 500.

(same argument here)

-Companies in the MSCI emerging-markets index that reported results since the end of the first quarter posted an average earnings drop of 92 percent, trailing analysts’ estimates by 14 percent, according to Bloomberg data. That compares with a 46 percent profit slide for Europe’s Dow Jones Stoxx 600 Index and a 31 percent fall for the S&P 500, Bloomberg data show.

Additional comments:

The general disposition of the article is one of negativity. It implies that EM stocks outperforming developed economy stocks seems like an anomaly and isn't destined to happen for long.

Not only that, such aberration in the past has signaled a reversal of global stock markets.

Looking at history to make comparisons, when present dynamics aren't the same seems either like anchoring or reductionism (oversimplification of causality).

While it is true that we seem to be seeing some weaknesses in global markets of late, it isn't certain that all global markets will behave similarly like in 2008 or in 2000. The article discounts the possibility of divergences, a phenomenon we think will manifest itself overtime.

Growth or financial ratios won't be the only issues that needs to be reckoned with, but more importantly for us, is the impact from concerted and coordinated policies by global governments on national markets and economy.

This is because every country has a distinct political economic structure that we assume would respond differently to such policies. And the diverse responses will likely be manifested on the asset market pricing.

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