Emerging Market Value Update

by | May 6, 2009 | Multi Currency Investing

The current economic correction creates many ways to increase profits in unusual ways.

Great opportunity comes because investors almost always over discount investments during troubled times.   In times of extra turmoil…. all the old rules…all the old data… all the past experiences lose their worth… because many of the old rules go out the window.

Which rules stay and which rules go… no one knows for sure.

This gives wise investors with a medium and long term view an extra edge in their investing.

The recent recoveries in markets suggests that this is a good time to buy shares.

There are no promises that there will be a sudden and sustained recovery. In fact the likelihood is that there will be a lot of ups and downs in the months ahead.

Longer term however… there are many reasons to believe that we have seen or are near the bottom of  the correction and that if one commits now and waits… they get a good return.

To get a better feel of which markets offer the best value, our last lesson looked at major markets as valued by Michael Keppler.

Here we look Keppler’s emerging market evaluation

If you are a new reader learn about Keppler Asset management here.

Recent Developments & Outlook

Emerging Markets recorded their first quarterly gain since December 2007 during the first three months of 2009.

The MSCI Emerging Markets Total Return Index gained 0.9 % in US dollars and 5.7 % in euros.

Over the last fifteen months, the MSCI Emerging Markets Index declined 52.9 % in US dollars and 48.1 % in euros.

The euro, which stood at 1.4621 versus the U.S. dollar at  year end 2007, at 1.3901 at the end of 2008 and at 1.3277 at the end of March 2009, lost 9.2 % versus the dollar over the last 15 months and 4.5 % year-to-date.

Of the three regional indices, Latin America and Asia gained 4.9 % and 1.6 %, respectively, while Europe Middle East and Africa (EMEA) declined 4.1 % during the first quarter.

Over the last 15 months, each of the three regions suffered larger declines than in any other 15-month period covered by our data history, which goes back
to the end of 1988:

Latin America (-49 %) fared best (in relative terms, i.e. its index lost a little less than the other two),  followed by Asia (-52.2 %) and EMEA (-57.5 %).

Performance numbers are in US dollars unless mentioned otherwise.

Nine markets advanced and fourteen markets declined in the first quarter.

Chile (+13.6 %), Brazil (+12.5 %) and Taiwan (+8.3 %) performed best year-to-date.

Poland (-31.4 %), Hungary (-28.8 %) and the Czech Republic (-15.7 %) came in last.

There was no place to hide during the last fifteen months. All twenty-three
markets covered here suffered mid to high double-digit percentage losses.

There were three changes in our performance ratings last quarter:

Korea was downgraded to “Neutral” from “Buy.”

Israel was downgraded to “Sell” from “Neutral.”

Egypt was upgraded to “Buy” from “Neutral”.

As of the end of March, 2009, the Top Value Model Portfolio contains the seven “buy” rated markets — Egypt, Hungary, Poland, Russia, Taiwan, Thailand and Turkey — at equal weights.

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

NEUTRALLY RATED MARKETS Argentina, Brazil, China Czech Republic, Indonesia, Jordan, Korea, Malaysia, Philippines, Pakistan, Peru, Russia, South Africa, Sri Lanka, Venezuela.

These times of turmoil…  reduce the value of databases and experience. Turbulence makes value orientation even more important.

For example in Michael Keppler’s latest  Major Market Review, he wrote:

The chart below, which shows the history of our implicit estimates for the equally-weighted World Index suggests, however, that while the euphoria in the second half of the 1990s made our estimates look too conservative in retrospect, the current pessimistic world economic outlook makes them appear rather aggressive now.

Keppler recognizes that value investing means that at market bottoms, share prices look too low (investors always oversell in panic) and at market tops share prices look too high (investors always overbuy through greed).

We can see how this disintegration of information affects investors.  Jyske Invest managers for example appear to have departed  from the value emphasis in their VAMOs (Value – Momentum – Strength) share selection process.

Normally Keppler and Jyske Invest independently end up choosing almost the same markets (they have different methods but each usually accurately assesses value so their different methods obtain similar results).

However at this time Jyske Invest appears to be looking more at current fundamentals.

They wrote in their Emerging Market Quarterly Assessment and review of the Jyske Invest Emerging Market Fund:

Large price fluctuations in emerging markets. The fund yielded a return of
0.24% in the first quarter,  under performing the benchmark by
0.71 percentage point.


Price falls in the first two months of the year were succeeded by decent price
increases in March. The US Federal Reserve’s decision to bypass the bank
system and buy government bonds directly on the market with a view to
increasing the liquidity in the economy was a landmark move this quarter, and
gave breathing space to equity markets worldwide.

But this in no way means that the global crisis is a thing of the past. The
crisis is impacting emerging markets through two channels.

First of all, emerging market countries are highly export-oriented. With
decreasing or directly declining growth on the main markets in the USA,
Europe and Japan, exports from emerging markets have collapsed

Secondly, the capital inflow to emerging markets has been strongly
reduced due to the growing uncertainty about the development in the world
economy. This is particularly a problem for a number of countries in
Eastern Europe which, for a number of years, have had large balance of
payments deficits and have thus been financing their growth through
international lending. This concerns countries such as Hungary, Turkey and
South Africa.

For this reason, among others, we have reduced our exposure to Eastern
Europe and Latin America and increased our exposure to Asia, which
is least dependent on capital inflow from abroad.


There is little doubt that 2009 will be a challenging year for emerging markets.
Emerging market equities are cheap measured according to traditional key
indicators. If an economic upturn does occur, it may lead to significant price

The depth and length of the global economic crisis is still unknown at
present, however, and there are still no significant signs that the global
economy is about to improve. There is therefore a major risk that the
companies’ earnings growth will disappoint the market, leading to
further downward revisions in 2009. If that becomes the case, it may lead to
further price drops. All in all, it is still too difficult to prophesise about
developments in 2009, but investors should prepare for a situation of
relatively large price fluctuations.

Keppler is showing the best value markets as Egypt, Hungary, Poland, Russia, Taiwan, Thailand and Turkey — at equal weights.  Jyske Invest is reducing its  exposure to Eastern Europe and Latin America and increasing exposure to Asia.

Look at the chart below showing the portfolio mix of the Jyske Invest Emerging Market Fund.

Normally I would expect Jyske’s weightings to fal somewhere near Kepplers.

Keppler has China, Brazil and Korea as neutrally rated markets.  Jyske Invest have these three markets as their largest holding in the fund.   India is a Keppler low value (sell) market.   It is the fifth largest holding.  Their selection systems only agree on one market (Taiwan) in the top five investments held in this fund.


The lesson here is that the market is undecided.   Jyske’s suggestion that there could be substantial price fluctuations is probably correct.  This plays well into the hands of  long term (12 to 24 months)  investors who can afford now to buy and ride through any remaining turmoil.

This suggests that systematically investing in good value shares on bad news could produce extra returns down the road for value investors now now.


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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 misinterpret 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