Multi Currency Emerging Market Update – July 2008


This is the June to July Multi Currency Emerging Market Value Review of Michael Keppler’s market valuations.

See more about why we use this analysis.

Recent Developments & Outlook

In solidarity with the Major Markets, Emerging Markets equities declined sharply last month. This month the Morgan Stanley Capital Index (MSCI) Emerging Markets Total Return Index lost 10 % in US dollars and 11.2 % in euros.

Year to date, the MSCI Emerging Markets Index is down 11.8 % in US dollars and 18.1 % in euros.

All three regional indices declined: Europe, Middle East and Africa (EMEA) was down 7.3 %, followed by Latin America (-7.7 %) and Asia (-12.5 %).

Year to date, Latin America still shows positive results with a gain of 9.3 %.  Asia was down 22 % while EMEA lost 6.4 % during the first six months.

All performance numbers are in US dollars with net dividends reinvested unless mentioned otherwise.

Only four markets included in the MSCI Emerging Markets universe rose last month, twenty-one markets declined.

Argentina (+14.2 %), Jordan (+8.4) and the Czech Republic (+2.1 %) delivered the highest monthly returns.

India (-19.6 %), the Philippines (-16.6 %) and Colombia (-15.9 %) performed worst.

Compared to their levels at the beginning of the year, eight markets were higher and seventeen markets were lower.

The biggest winners this year have been Argentina (+44.7 %), Morocco (+30.4 %), and Jordan (+15.1 %).

India (-41.4 %), Turkey (-39.3 %) and the Philippines (-38 %) have performed worst so far this year.

There is one change in Keppler’s performance ratings this month: Jordan is downgraded to “Sell” from “Neutral”.

This  does not affect the Top Value Model Portfolio, however, which contains the eight national MSCI markets Hungary, Israel, Korea, Malaysia, Poland, Taiwan, Thailand and Turkey at equal weights.

According to Kepper’s performance ratings, these markets offer the highest expectation of risk-adjusted returns for long-term investors.

SELL CANDIDATES (Low Value) China , Egypt , India , Indonesia , Jordan, Morocco.

NEUTRALLY RATED MARKETS Argentina, Brazil, Chile, Colombia, Czech Republic, Israel, Mexico, Philippines, Pakistan, Peru, Russia, South Africa, Sri Lanka, Venezuela,

According to Keppler’s performance ratings, these emerging stock markets offer the highest expectation of risk-adjusted returns.

For more details on Keppler’s analysis, contact Roderick Cameron at 1-212-245-4304 or email roderick.cameron@kamny.com

Lessons

The Emerging Market Top Value Model Portfolio declined 9.3 % in
dollars and 10.5 % in euros last month, 0.7 % better than the MSCI benchmark.

The lesson we learned last update was that value portfolios tend to drop more than benchmarks during market corrections.

This lesson is reconfirmed in this emerging market analysis.  Keppler’s Emerging Market Top Value Model Portfolio  has underperformed the MSCI benchmark. Since the beginning of the year, the Top Value Model Portfolio has lost 13.4 % in US dollars and 19.6 % in euros, underperforming the benchmark by 1.6 percentage points in dollars and by 1.5 percentage points in euros.

The first lesson we can learn from this valuation is that currently the US dollar is stronger versus the euro than many investors appreciate.

When you see markets losing 13.4 % in US dollars and 19.6 % in euros, the difference is between 13.4% and 19.6% is currency loss.

The lessons in this are to never expect any currency to always fall versus others and wen the US economy sneezes, the rest of the world still gets a cold.

Another lesson can be learned in the tables below that compare Keppler’s Major Markets Top Value Model Portfolio with the MSCI World Index as of the end of June:

Emerging Markets Top Value Portfolio
Price to Book Value         1.8
Price to Cash Earnings    7.3
Price to Earnings            11.2
Dividend Yield                 3.2%
Cash Earnings Return in Equity   25.2%
Return on Equity             16.3%

Emerging Markets MSCI World Index
Price to Book Value         2.4
Price to Cash Earnings    9.2
Price to Earnings            14.0
Dividend Yield                 2.3%
Cash Earnings Return in Equity   25.7%
Return on Equity             16.8%

We can see that as with the major markets, Keppler’s portfolio offers better value.
At the price earnings level for example, Keppler’s portfolio holds shares with a 7.3 P/E ratio versus 9.2 for the benchmark.The lower the P/E ratio the the better.

Plus Keppler’s portfolio offers a much higher dividend yield. 3.2% versus the 2.3% for the benchmark.

Another extremely important lesson comes from comparing major market benchmarks with emerging market benchmarks.

Major markets are considered safer than emerging markets so should be more expensive.  Yet right now there is little difference. In fact the P/E ratios for both major and emerging markets are identical.

This means that major markets are more likely to be good value than emerging markets now.

This is not surprising. In the four years of hot performance (2003 to 2007) investors flocked into the higher performing emerging markets and overheated prices. Now we see a stronger correction in emerging markets evidenced by the drops in India (-41.4 %), Turkey (-39.3 %) and the Philippines (-38 %).   The worst major markets were Belgium (-27.6 %), Italy (-22.5 %) and Hong Kong (-22.1 %), bad enough but about half as bad as the emerging.

Major Markets MSCI World Index
Price to Book Value         2.1
Price to Cash Earnings    9.2
Price to Earnings            14.3
Dividend Yield                 2.9%
Cash Earnings Return in Equity   22.7%
Return on Equity             14.6%

Emerging Markets MSCI World Index
Price to Book Value         2.4
Price to Cash Earnings    9.2
Price to Earnings            14.0
Dividend Yield                 2.3%
Cash Earnings Return in Equity   25.7%
Return on Equity             16.8%

A further comparison of Kepper’s Top Value Emerging Portfolio with the Top Value Major Portfolio shows an even greater distortion. The P/E ratio for major markets at 6.6 is much lower than emerging at 7.3.

This suggests that major markets offer much greater value than emerging markets now.

Major Markets Top Value Portfolio
Price to Book Value         1.6
Price to Cash Earnings    6.6
Price to Earnings            10.1
Dividend Yield                 4.8%
Cash Earnings Return in Equity   23.7%
Return on Equity             15.6%

Emerging Markets Top Value Portfolio
Price to Book Value         1.8
Price to Cash Earnings    7.3
Price to Earnings            11.2
Dividend Yield                 3.2%
Cash Earnings Return in Equity   25.2%
Return on Equity             16.3%

Gary

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