Emerging Market Value Update – Jan. 2009


Where can one invest and logically expect a fast return?

The US T-Bond 10 year yield is really low at 2.63%. Investment there may seem safe but will e eaten aloe by inflation.

The US stock market is weak now as well. The Morgan Stanley Capital Index is : 830.42  down this week by -2.5% and already down 10% since the beginning of the year.

The global investment world gave their opinion of major markts after President Obama’s inaugural speech accorrding  to a New York Times excerpt that says:

Dow Falls More Than 330 Points; S.&P. Drops More Than 5 Percent After hearing the new president’s inaugural address, investors went back to selling stocks, sending the major indexes down sharply. Traders on the floor of the New York Stock Exchange paused at times to watch the inauguration ceremony and President Barack Obama’s remarks, but the transition of power did not erase investors’ intensifying concerns about the struggling economy. At the close, the Dow Jones industrial average was down more than 330 points, or about 4 percent, while the broader Standard & Poor’s 500-stock index fell 5.2 percent.

This news  creates some unprecedented opportunity and I have been working closely with Jyske Bank and Jyske Global Asset Management (JGAM) to help our readers understand why and how the current economic  corrections create phenomenal investing value.  Therefore we have agreed to replace our May Spanish course with a Global Asset Value to join up with JGAM and speak at their JGAM Global Asset Value Strategy Seminar  in Naples Florida, May 29 to 31.  More on this in a moment.

First, where to invest for the most likely fast returns now.

Commodities are not a quick answer either.  Crude oil is $ 41.77  down -3.1% this week and down -17%in the last three weeks.

GOLD is up a bot at $880.53  and the dollar showing a little strength…but the real answer is VALUE.  How does one value gold?

Where can we see value?

How about emerging markets? They have been hit hard so there is special value there now. Plus the euro may be in trouble.  We’ll look at the euro problem in a moment.

First emerging markets.

Jyske Invest Global Investment Management (JGAM) just wrote:

The main event this week was the inauguration of the new President. In the financial markets it is again the financial sector that is making the headlines. Thursday John Thain was forced to resign from BoFa/Merril Lynch as losses were much bigger at Merril Lynch than first expected (USD 41.2 billion for 2008) and Mr. Thain was also criticized for paying Merril Lynch bonuses a month early just before the merger talks (rumoured to be USD4 billion). The deal has already been named “The deal from hell”. The S&P financial fell 6.7% on Thursday with BofA falling 14.5%. Citigroup fell 15.3% due to speculation of a possible federal takeover of ailing financial institutions. Microsoft cut 5000 jobs the first company-wide job cuts in its history – its share price fell 11.7% on Thursday. Sony warns it will suffer its first full year operating loss in 14 years. In the US Home constructions fell 15.5% in December.

Obama has his hands full…but look what JGAM said about China.

“In China the 4th quarter GDP rises 6.8% making the full year increase 9% after 13% in 2007. ”

9% growth in 2008 is darn good!

Michael Keppler’s update on emerging market value supports the idea that there is growing value in emerging markets. His most reent comments are:

After five years with double-digit returns through 2007, Emerging Markets in 2008 suffered their worst annual decline in twenty years.

In 2008, the Morgan Stanley Capital International (MSCI) Emerging Markets Index  dropped 53.3 % in US dollars and 50.9 % in euros.  This compares to a total annual decline for the MSCI World Index of the developed markets in 2008 of 40.7 % in US dollars and 37.6 % in euros.

Thus, after having outperformed the developed markets for seven consecutive years, in 2008, Emerging Markets underperformed the Major Markets by 12.6 and 13.3 percentage points in US dollars and in euros, respectively.

Over the last eight years ending in December 2008, the MSCI Emerging Markets Index delivered a total return of 105.9 % in US dollars and  39.1 % in euros, while the MSCI Major Markets Index lost 13.5 % in US dollars and 41.6 % in euros.

Among the regional indices, Asia performed best in December (+11.2 %), Europe, Middle East and Africa (EMEA) gained 4.5 % and Latin America advanced 3.1 %.

There was no big difference in the year-to-date returns: each region
lost more than 50 %.

Performance numbers are in US dollars if not mentioned otherwise.

Twenty markets closed higher in December and three markets declined. The three top performers of the month were Indonesia (+24.3 %), Korea (+19.8 %) and Egypt (+17.4 %).

Russia (-7.8 %), Argentina (-2 %) and the Philippines (-1.2 %) performed worst last month.

As for the calendar year 2008, all twenty-three markets included in the MSCI
Emerging Markets universe declined. What a difference to 2007, when all but two markets of the MSCI EM universe advanced and the MSCI Emerging Markets Index gained 39.4 % in US dollars and 25.7 % in euros!

The best performing Emerging Markets in 2008 — i.e. those which lost least — were Morocco (-11.1 %), Colombia (-25.1 %) and Israel (-29.3 %). Russia (-73.9 %), India (-64.6 %) and Turkey (-62.3 %) performed worst.

The Emerging Markets Top Value Model Portfolio, which invests according to the Top Value Strategy and assumes index returns for each national market included in the strategy, gained 6.4 % in US dollars and lost 2.9 % in euros last month.

In 2008 the Emerging Markets Top Value Model Portfolio declined 53.3 % in US dollars and 50.8 % in euros, matching the benchmark.

The table below shows how the Emerging Markets Top Value Portfolio compares to both the MSCI Emerging Markets and Major Markets Indices at year-end 2008.

MSCI Index
Valuation Ratios                  Emerging Markets        Major Markets                                  Price to Book Value                       1.4                               1.44

Price to Cash Earnings                   5.4                               6.1

Price to Earnings                             8.5                             11.0

Dividend Yield                                 4.14                            3.90

Cash Return on Equity                     26.2                           23.5

Return on Equity                             16.5                             13.1
After having eliminated Jordan in November 2008, MSCI now took out Pakistan from its MSCI Emerging Markets Index.

We therefore also drop Pakistan from the list of Emerging Markets presented here.

There is one change in our performance ratings this month: Mexico is downgraded to “Sell” from “Neutral”.

The Top Value Model Portfolio  holds the seven “Buy”- rated markets Hungary, Korea, Poland, Russia, Taiwan, Thailand and Turkey at equal weights. According to our performance ratings, these markets offer the highest expectation of long-term risk-adjusted returns.

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

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

NEUTRALLY RATED MARKETS Argentina, Brazil, China Czech Republic, Indonesia, Israel, Jordan, Malaysia, 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

Here is the point about emerging markets.

Emerging Markets Index  dropped 53.3 % in US dollars and 50.9 % in euros in 2008 versus  40.7 % in US dollars and 37.6 % in euros for developed markets.

Emerging markets outperformed the developed markets for seven years in a row but in 2008  underperformed the Major Markets by 12.6 and 13.3 percentage points in US dollars and in euros.

Emerging markets are badly needed to produce low cost goods. Globalization is the moving force of the world’s economy. Emerging markets are not lumbered by the huge social costs of developed markets and they fell further than major markets in 2008 not due to fundamentals…but fear.    These are thinly traded markets likely to quickly rise faster than major markets. Investors will figure this out and invest back in. They already may have as December 2008 was good month for emerging markets.

Now let’s look at the Euro.

JGAM just wrote to me:

The Eurozone however is also having its own serious problems. The UK is now officially in a recession. Portugal Wednesday became the third economy in two weeks to suffer a credit rating downgrade (Spain and Greece have already been downgraded) and Ireland has been put on a negative outlook. The Danish parliament Sunday agreed on a new bank help package totalling DKK 100 billion (USD 17 billion).

The US dollar has been strong and has a low interest rate (opposite the formula we want to invest).  Major markets look in trouble.  They are not likely to get better right away.  So how does this create value.

Look at other Europan currencies.  Those who have read this course for long know I have never been a great fan of the euro. I prefer the currencies of countries that are in the EU but did not adapt the euro…the British pound, the Danish and Swedish kroner…plus Norway’s kroner (Norway is not in the EU).

Look again at the currency breakdown of my portfolio.  You will see I have 23% of my portfolio in these currencies!  This is a huge over weighting.

One way to take advantage of this opportunity is by investing British pounds now and Jyske Global Asset Management just set me this note.

At the Investment Committee meeting on the 15th of January we decided to take a long position in GBP & JPY against the USD.

The stop loss level in GBP was reached before the position was taken. We thus had an Ad Hoc meeting today to consider our options.

We decided to take the long position in GBP at these new levels as we feel it has fallen to much to quickly and should be poised for a rebound.

We sell USD against GBP at 1.3986 with a stop loss at 1.35 which is below the low of  1.3730 set in August 2001.   We executed the USD/JPY as agreed at the meeting on the 15th of January. We sold USD at 90.166 with a stop loss at 103.00

These may be tow of the fastest growing investments for those who are not too risk averse…emerging markets and the Britsh pound. Like always never speculate  more than you can afford to lose.

Regards,

Gary

Join Merri, me and Peter Laub of Jyske Global Asset Management at OUR INTERNATIONAL INVESTING & BUSINESS COURSE IN ECUADOR. We review economic conditions, Ecuador real estate, my entire portfolio plus investing and business ideas for the months ahead.

Join us at a course in Cotacachi or on Ecuador’s coast this winter.

Here are delegates enjoying a coffee break.

Spanish-Course-Delegates

Served by our caring staff.

cotacachi-hotel-food

Feb. 13-15 International Business & Investing Made EZ
Feb. 16-17 Imbabura Real Estate Tour

March 8-9 Imbabura Real Estate Tour
March 10-15 Ecuador Export Expedition
March 16-19 Coastal Real Estate Tour

Plus  beause of the unusal opportunity that is unfolding, we have agreed to replace our May Spanish course with a Global Asset Value to join up with JGAM and speak at their JGAM Global Asset Value Strategy Seminar  in Naples Florida, May 29 to 31.


Related Artices

If you enjoyed this article "Emerging Market Value Update – Jan. 2009" you may find these related articles of interest too:

    None Found