Good article even if you dont agree with the outcome, thought process is great and question is one all value investors should be asking.
I’d Choose Emerging Markets, Wouldn’t You? by Ryan Larson, Research Affiliates
An early book in the series covers some of Clifford’s obvious faults, mostly due to his being unaware of the effects of his massive size: he chases and catches cars, carries back a policeman thinking his baton is a stick, eats the shoe sign outside a shoe store, and devours a lot of cupcakes. Despite all his flaws, Clifford is dearly loved by Emily Elizabeth, the little girl who takes care of him. She says, “I’d choose Clifford, wouldn’t you?”
Emerging markets, like Clifford, have grown rapidly, and their increased scale can cause quite a ruckus when they stumble. They have certainly displayed plenty of flaws over the past three years…………….Nonetheless, long-term investors should seriously consider choosing emerging market value stocks.
Emerging Market Performance
Not since the Asian Contagion and Russian ruble crises of 1997–1998 have emerging market stocks underperformed U.S. stocks by as much as they have over the past three years (see Figure 1).
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Although subject to investor sentiment and behavior, the other lever—valuations—is also favorably positioned. Emerging markets look inexpensive by any valuation metric. We prefer the cyclically adjusted price-to-earnings ratio (CAPE) measure, also known as the Shiller PE, because it smooths the business cycle. The U.S. stock market is perched at a 25x CAPE, while emerging market stocks are nearly half that level at 14x.
Diverging Sectors Within Emerging Markets
The consumer sector is trading at a 27x price-to-earnings (P/E) ratio and a price-to-book (P/B) of 3.6x, both more than twice the corresponding measures for the broad emerging market index (see Figure 2). Ironically, investors who are worried about slowing growth in China and other emerging markets are paying premium prices for companies whose earnings may be the most at risk.
On the flip-side, the weakest emerging markets sector is energy. There is a stark difference between integrated oil companies based in the United States, on one hand, and in Brazil and Russia, on the other. Over the past three years U.S. energy companies’ stock prices rose 18% while the stocks of emerging market energy companies fell 33%.
Full article here.