Societe Generale: Are Emerging Markets Looking Cheap?

Societe Generale: Are Emerging Markets Looking Cheap?

Emerging markets have been taking a beating, and whenever the crowd moves in one direction value investors have to ask themselves if it’s time to do the opposite. A note released today from Societe Generale’s global equity team suggested that it might be time to look for good deals, even though the overall trend is still downward and the risks are very real.

Previous month for emerging markets

“Last month was the worst month for emerging markets since May last year,” writes Andrew Lapthorne. “Several emerging markets saw double digit declines, principally through collapsing currencies. Thailand, India, Turkey, the Philippines, Sri Lanka and Indonesian all slid by more than 10 percent over the month.”

The reason for this poor performance is widely known: the end of qualitative easing in the U.S. means that investors can make money in the U.S. and Europe, and they are pulling money out of EM assets. Some countries will also take a hit because increasing interest rates will make it more expensive to finance short-term external debt. Lapthorne doesn’t think that emerging markets have bottomed out, but that doesn’t change the fact that some prices may already be too low.

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“The dollar performance gap between many of these countries and the US and Eurozone is throwing up opportunities not immediately apparent in valuation metrics like PE ratios,” says Lapthorne. “Yes, dollar earnings will be weaker, but many of their earnings are already dollar-denominated. Not a trade for the fain-hearted perhaps, but in a QE damaged world (QED) who’s the better long-term growth story, Brazil or the Eurozone?”

For value investors looking to get in before flows reverse direction, it’s worth remembering that the iShares MCSI Emerging Markets Index only accounts for about 4 percent of all stocks in the developing world, and the MSCI EM Small Cap covers about 9 percent, not to mention other assets that may be available. That adds up to a lot of uncharted territory, and looking for a diamond in the rough when everyone else is focused on Europe and the U.S. could be the best way to take advantage of the current financial climate.

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