Emerging Market Valuations Aug. 2009

by | Aug 8, 2009 | Multi Currency Investing

The impact of the recession on emerging markets has created many ways to increase profits.

In our last emerging market update three months ago, I wrote:

Great opportunity comes because investors almost always over discount investments during troubled times.

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.

This was spot on because as you will see below, emerging markets had the best quarter in history!

To get a better feel of which markets offer the best value, each quarter we review emerging 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 equities recorded their highest ever quarterly return. In the second quarter 2009, the MSCI Emerging Markets Total Return Index (December 1988=100) gained 34.7 % in US dollars and 27.5 % in euros.

This brings the year-to-date total return of the global Emerging Markets benchmark to 36 % in US dollars and 34.8 % in

Of the three regional indices, Asia gained 33.9 %, Europe Middle East and Africa (EMEA) is up 32.9 % and Latin America gained 38.5 % during the second quarter 2009. During the first half of 2009, Asia, EMEA and Latin America are up 36, 27.5 and 45.3 percent, respectively. Performance numbers are in US dollars unless mentioned otherwise.

All markets covered here were up last quarter. Hungary (+69.7 %), India (+59.8 %) and Turkey (+56.6 %) had the most impressive returns.

Peru (+11.2 %), Israel (+15.8 %) and Morocco (+19.6 %) came in at the bottom of the performance range with what would be very desirable double-digit returns under normal circumstances.

Year-to-date, all but one market came in with positive returns.

Leading the pack during the first six months was Brazil. Due to its soaring local currency, Brazilian equities turned a 33.2 percent return in local currency into a 58.5 percent total return in US dollars. India (+57.4 %) and Indonesia (+56.3 %) followed closely behind.

In the second quarter 2009, 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 45.5 % in US dollars and 37.7 % in euros, outperforming the benchmark by 10.8 percentage points in US dollars and by 10.2  percentage points in euros.

Year-to-date, the Emerging Markets Top Value Model Portfolio advanced 31.4 % in US dollars and 30.2 % in euros, underperforming the benchmark by 4.6
percentage points.

There were two changes in our performance ratings last quarter: Korea was downgraded to “Sell” from “Neutral” and Brazil was upgraded to “Buy” from “Sell”.

The Top Value Model Portfolio now contains the eight “buy” rated markets: Brazil, Egypt, Hungary, 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. The following table shows how the Emerging Markets Top Value Portfolio currently compares to the MSCI Emerging Markets Index and the MSCI World Index of the developed markets.

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

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

It is unusual for a market to rise all the way from sell to buy as Brazil did this quarter. This is in keeping with our thoughts on Brazil Distortion Thoughts published in  April and June.

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

The reverse an be true. With this type of good news… be careful. The lack of fundamentals economic support is not there.  See a warning here.


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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