Emerging Market Update October 2008


This is a summary of the September to October 2008 Emerging Market Value Review of Michael Keppler’s market valuations.

Recent Developments & Outlook

The recent sell-out in Emerging Markets equities accelerated last month: the Morgan Stanley Capital International (MSCI) Emerging Markets Total Return Index (with net dividends reinvested, December 1988=100) dropped 17.5 % in US dollars. This marked the second largest monthly decline for this index since its inception in December 1988. The largest monthly drop — a whopping 28.9 % loss — occurred in August 1998 in connection with the collapse of the Hedge Fund Long-Term Capital Management (LTCM). In euro terms, the
emerging markets benchmark dropped 13.5 % last month.

During the first nine months, the MSCI Emerging Markets Total Return Index caved in 35.5 % in dollars and 32.9 % in euros.

As was the case in the developed countries, there was no place to hide in Emerging Markets last month either.

By region, Latin America lost 19.6 %; Europe, Middle East and Africa (EMEA) was down 17.4 %, and Asia declined 16.6 % last month.

Year-to-date, Latin America is down 26.3 %, while EMEA and Asia lost 33.1 % and 40.1 %,
respectively (performance figures are in US dollars unless indicated otherwise).

All twenty-five markets covered here declined in September.

Pakistan (-3.3 %), the Philippines (-6.3 %) and Israel (-8.1 %) fared best in relative terms.

Argentina (-24.7 %), Russia (-23.7 %) and Brazil (-23.1 %) suffered most.

Year-to-date, only Morocco (+2.0 %) managed to eke out a positive return, Jordan came in unchanged, and the third best market, Colombia, lost 9.1 %.

The worst performing markets year-to-date were India (-49.5 %), Pakistan (-47.9 %) and Russia (-46.4 %).

There are two changes in our performance ratings this month: Both China and Indonesia are upgraded from “Sell” to “Neutral”

This does not affect the composition of the Top Value Model Portfolio, however, which contains the seven national MSCI markets Hungary, Korea, Malaysia, Poland, Taiwan, Thailand and Turkey at equal weights. According to our performance ratings, these markets offer the highest expectation of risk-adjusted returns for long-term investors.

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

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

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

Remember that the overall market value is just one of many filters we should use when we review value. The seven steps we use in our reviews include

1: Are the shares traded in a good value market?
#2: Does the share trade at fair Price to Earnings and Price to Cash Flow ratios?
#3: Does the share pay a good value dividend?
#4: Do the share have a good value relative to their previous price?
#5: Does the company have rising earnings?
#6: Has the share price been rising?
#7: Is the company’s management good and is their product or service line in a wave of the future

Michael Keppler also reminds investors not to misinterperate the investment analysis implicit in the Country Selection Strategy. A country is BUY-rated based on the valuation levels reflected in the MSCI benchmark index of country. A BUY rating therefore does NOT imply that any stock in that country would be considered an attractive investment.

To invest according to the Country Selection Strategy it is necessary to
construct diversified, risk-controlled, representative country portfolios in
every BUY rated country, weighting each country approximately equally in the
overall portfolio. It is not appropriate to instruct a stockbroker to simply to select stocks in the BUY rated countries.

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

Regards,

Gary

Please send me any other questions. I’ll give the questions priority if you add BL in the subject line. I cannot give you direct investment advice individually but can answer questions (without disclosing your identity) in these lessons.

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