Featured # Editorials | 3 years ago

Conflicting Valuations of Emerging Global Markets Becoming More Profound

More optimistic wealth managers stated their opinions earlier in the week that some emerging markets are so undervalued that investors should be looking to buy now. An official from Research Affiliates LLC said that buying now could become the “trade of a decade,” due to the recent plummet of both the benchmark stock index, which has fallen nearly 30% throughout the previous three years, and local-currency bonds, which have fallen 26%.

The other side of the debate cites global anxiety regarding fragile GDP growth, corporate debt being on pace to reach levels of a crisis, and generally unfavorable government policies as to why they dislike the idea of investing in emerging markets at this time. There are three major arguments being made by the bullish investors who see this time as an amazing opportunity to invest in developing nations. The first of their points is the fact that developing nation’s stocks have only ever been less expensive than they are today a total of six times in history, based on data collected by Research Affiliates LLC. At this moment, emerging market shares are valued at levels 28% lower than their fully developed nation counterparts. In addition, developing market’s bond yields are currently 5.07% higher than U.S. Treasury yields, and Brazil in particular currently offers a 14.8% real-denominated debt yield to quell fears of default or inflation.

Optimistic money managers also believe that emerging markets are currently facing less restrictive global trends. For instance, oil prices have finally begun to stabilize and China has increased its effort’s in enticing growth. In addition, the idea that the U.S. Central Bank will be raising interest rates is being whisked away, and the strengthening of the USD has relatively slowed. According to Michael Hasenstab, CIO for global macro at Franklin Templeton, investors have sold their shares in emerging markets unsystematically. Hasenstab highlighted a few countries that he believes to have, “solid fundamentals,” but are not being respected as such, countries such as: Indonesia, Malaysia, South Korea, the Philippines, and Mexico.

In contrast, the pessimistic view on the topic is summarized by three main arguments, the first being that developing nations are not undervalued; they are valued properly at their low levels. According to the Economic Surprise Index developed by Citigroup, signals from production to jobs have not lived up to analyst expectations in emerging markets since January. These developing nations are also not getting a boost from exports due to global trade being stagnant. Furthermore, developing nations central banks have been raising the cost of borrowing as a means to fight inflation.

Bearish investors also look to the $2.8 trillion worth of foreign currency debt in emerging economies when defending their stance. According to Bhanu Baweja, the head of emerging-market cross-asset strategy at UBS, lower wages and constricting lending circumstances are hindering companies’ ability to pay their debts. This occurrence can lead to governments having to use government run banks to prop up these businesses, which will increase the costs associated with borrowing for all.

According to market strategists, developing nation’s governments are controlling too much of their economy, which will lower the prices of their nations assets. The best example of this notion is Brazil, where their state run capitalist economy has aided the country’s nose-dive into the worst recession in nearly a century. Nations such as Russia, Turkey, and Poland are also being suspected of having governments that seek too much control in their nation’s economies for their stock markets to flourish.


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