Opportunity Emerging

Emerging stock markets are offering good value as developed market prices have swollen.

Here is an excerpt from the latest Purposeful investing Course (Pi) Emerging market update.

This is Keppler Asset Management’s Recent Developments & Outlook of emerging markets

After a strong performance last year, emerging markets equities have continued to perform well in the first half of 2017.

Currency movements, however, turned out to be more important than stock price changes lately.  In the second quarter, the MSCI Emerging Markets Total Return Index (ND) gained 6.6 % in local currencies and 6.3 % in US dollars.  Due to the strong recovery of the euro, however, it lost 0.3 % in euros.

Year-to date, the global emerging markets benchmark index returned 14.8 % in local currencies, 18.4 % in US dollars and 9.5 % in euros.

Among the three regional indices, Asia returned 9.1 %; Europe, Middle East and Africa (EMEA) gained 0.7 % and Latin America declined 0.4 % in the last three months.

In the first half of 2017, Asia gained 19.7 %, EMEA was up 0.6 % and Latin America advanced 7.2 %.  Performance is in local currencies unless mentioned otherwise.

Pakistan was upgraded from Frontier Market status to join the MSCI Emerging Markets Index on June 1, 2017. Since no market was downgraded, there are now 24 markets included in the MSCI EM Index.

Eighteen markets advanced in the second quarter and six markets (including Pakistan) declined.

The best performing markets were Greece (+25.5 %), Turkey (+15.4 %) and Korea (+12.8 %). Qatar (-10.4 %), Russia (-6.2 %) and Brazil (-2.6 %) performed worst last quarter.

Year-to-date, twenty-one markets advanced and three markets declined. The best performing markets in the first half of 2017 were Turkey (+32.4 %), China (+25.5 %) and Korea (+22.0 %). Russia (-16.2 %), Qatar (-8.7 %) and Pakistan (-3.9 %) came in last.

In the second quarter 2017, the Top Value Model Portfolio advanced 4.7 % in local currencies and 5.3 % in US dollars but declined 1.3 % in euros.

Year-to-date, the Top Value Model Portfolio gained 12.0 % in local currencies, 15.9 % in US dollars and 7.2 % in euros, underperforming the MSCI Emerging Markets Index by between 2.3 and 2.8 percentage points, depending on the currency.

There was no change in our country ratings last quarter. The Top Value Model Portfolio contains eleven markets — Brazil, Chile, China, Colombia, the Czech Republic, Korea, Malaysia, Poland, Russia, Taiwan and Turkey — at equal weights.

According to our analyses, an equally weighted combination of these most attractively valued markets offers the highest expectation of long-term risk-adjusted performance.

The table below shows how the Emerging Markets Top Value Model Portfolio compares to the MSCI Emerging Markets Index and to the MSCI World Index at the end of June 2017, based on selected assets and earnings valuation measures:


Based on our analyses, the asset class Emerging Markets Equities is now undervalued by 21 % compared with the MSCI World Index of the developed markets.  Furthermore, our Emerging Markets Top Value Model Portfolio is undervalued by 20 % versus the MSCI Emerging Markets Index and by 37 % versus the MSCI World Index.  The outlook for further outperformance of emerging market equities versus the developed markets in general and of the Emerging Markets Top Value Model Portfolio in particular, over the next three to five years, remains favorable.

Michael Keppler
New York, July 17, 2017

That review shows that emerging markets overall are a much better value than developed markets overall.  Here’s  a more important question.  How much better value are good value emerging markets versus good value developed markets?

Let’s compare.

Price to book for emerging markets is 1.37.  Develop good markets are selling at 1.47 price to book.   The good value emerging market PE ratio is 12.9 compared to 19 for developed markets and the dividend yield 3.35% compared to 3.31% for emerging markets.


These numbers suggest that both developed and emerging good value markets are much less expensive than the overall world index and way cheaper than the bloated US index.   At a price to book of 3.13, the US market is selling at more than double the price to book of both developed and emerging good value markets.

With this in mind, I have not changed my developed market to emerging market ratios.



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