Prior to the 2010 shift we weighted our recommendations toward investments in emerging markets. They enjoyed faster growth than developed markets. Then in 2010 we warned that values had flipped. Developed markets offered better value than emerging markets.
This value advice was valuable. Since the proof of the pudding is in the eating, here is the proof. This site recommended that the easiest way to reach major market value was the iShares MSCI World Index Fund ETF (symbol XWD ). The MSCI World Index represents the value of 6,000 shares in 23 Developed Markets countries.
Click on charts to enlarge.
This iShares ETF represents an investment in the Morgan Stanley Capital Index World. This chart from www.finance.yahoo.com shows the ETF is up 31.05% since early 2010.
During this same period this chart from www.finance.yahoo.com of the IShares Morgan Stanley Capital Index Emerging Market Index ETF shows that this index dropped -2.42% over the same period.
Now the values have flipped again. See why below in the Keppler Asset Management Emerging Market Value Update for the Summer of 2013.
Once a quarter we look at the emerging equity market valuation analysis by Michael Keppler. Michael’s firm is the best when it comes to value analysis of stock markets.
Here is an update on the values of emerging stock markets by Keppler Asset Management.
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Recent Developments & Outlook
In the eleven years from the turn of the century to the end of 2010, Emerging Markets had a total return of 10.2 % p.a. This compares to a compound annual loss of 0.28 % for the Developed Markets during the same period.
Since then, this trend has turned and the Emerging Markets have lost about 22 % in relative performance.
The trend of underperformance has even accelerated this year with Emerging Markets losing some 4.9 %, while their sisters in the Developed Markets were up 11.7 % through the end of June 2013.
In the second quarter, the MSCI Emerging Markets Total Return Index (December 1988 = 100) declined 4.4 % in local currencies, 8.1 % in US dollars and 9.2 % in Euros. Year-to-date, the MSCI Emerging Markets Total Return Index is down 4.9 %, 9.6 % and 8.3 % in local currencies, US dollars and Euros, respectively. The index now stands at $ 1,239 and € 1,051. The Euro gained 1.2 % versus the US dollar in the second quarter and, at the end of June, stood at 1.2999 (USD/EUR), down 1.4 % compared with its level of 1.3184 at year-end 2012.
Among the three regional indices, Asia gave up 3.2 %, Europe, Middle East and Africa (EMEA) declined 3.1 % and Latin America lost 8.9 %. Year-to-date, all three regional indices declined: Asia by 3.3 %, EMEA by 4.1 % and Latin America by 10.0 %. Performance numbers are in local currencies unless mentioned otherwise.
Five markets advanced and sixteen markets declined last quarter.
Malaysia (+8.4 %), Hungary (+8.2 %) and India (+3.2 %) performed best, while Peru (-27.5 %), Turkey (-9.9 %), and Brazil (-9.4 %) did worst in the last three months.
Year-to-date, the Philippines (+13.8 %), Indonesia and Malaysia (both up 8.8 %) performed best. Peru (-29.3 %), the Czech Republic (-17.4 %) and Egypt (-11.8 %) came in last.
The Top Value Model Portfolio based on the Top Value Strategy (December 1988 = 100) declined 2.5 % in local currencies, 4.4 % in US dollars and 5.6 % in Euros last quarter.
Year-to-date, the Top Value Strategy lost 3.4 % in local currencies, 8.1 % in US dollars and 6.8 % in Euros.
There was one change in our performance ratings last quarter: Turkey was downgraded to “Neutral” from “Buy”.
Turkey was added to the Top Value Model Portfolio at the end of April 2005.
During the last eight years and one month, the MSCI Turkey TR Index advanced from $125 to $350, a compound annual return of 13.6 % versus 10.8 % for the MSCI Emerging Markets Index. Even though Turkey was not extremely overvalued based on its absolute valuation, the relative and historic benchmark comparisons — mainly it’s relative current (1.34), historic (1.32) and relative historic (1.47) Price/Dividend ratios — triggered the signal.
After having sold Turkey, the Top Value Model Portfolio contains the nine markets — Brazil, China, the Czech Republic, Hungary, Korea, Malaysia, Poland, Russia and Taiwan — at equal weights. According to our performance ratings, an equally weighted combination of these markets offers the highest expectation of long-term risk-adjusted performance.
The following table shows how the Emerging Markets Top Value Model Portfolio compares to the MSCI Emerging Markets Index and to the MSCI Developed Markets Index at the end of June 2013, based on selected asset and earnings valuation measures:
Based on our valuation and return analyses, the Emerging Markets are now undervalued by 20.7 % versus the Developed Markets, while the Emerging Markets Top Value Model Portfolio is now undervalued by 24.1 % versus the MSCI Emerging Markets Index and by a whopping 40.1 % compared with the MSCI World Index of the Developed Markets.
This bodes well with regard to potential outperformance of Emerging Markets in general and our Emerging Markets Top Value Model Portfolio in particular over the next three to five years.
Michael Keppler New York, July 16, 2013
This update suggests that this is a good time to take profits on over weighting of developed market shares and to re calibrate one’s portfolio to an over weighting of emerging market shares.
Subscribers to our Multi Currency report can access the entire 52 page emerging market value update at the password protected site. Click here.
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 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.