Emerging market investors ended 2005 a happy bunch: the MSCI emerging market index rose 30% last year in dollar terms, about four times the MSCI World index. And according to most of the markets’ analysts, the fun isn’t over yet.
The key point to note, Andrew Marshall of Gartmore told the Malaysia Star, is that, despite the strong returns seen in 2005, emerging markets – treading on an average current p/e of 13 times – are still cheaper than those in developed markets. Note that the US market trades on an average of 18.9 times and the UK’s FTSE 100 on just under 15 times.
But is that cheap enough? Edward Hadas of Breakingviews.com is not convinced. Emerging markets have, he says, always been cheaper than developed markets for one very good reason – they are riskier.
The optimists say that this is no longer really the case; that the “new-found economic maturity” of emerging markets means that they should no longer trade on much of a discount. But while that may be true of some markets, investors should discrimi¬nate: far from being one entity, emerging markets come with different risks of differing size.
For the last few years, global growth and large inflows of foreign money have obscured some of these risks. The real tests of market maturity, says Hadas, will “only come when harder times return”. John Chilsolm, of Acadian Asset Management, agrees, telling the International Herald Tribune that as soon as something happens that “gives investors pause”, riskier markets will face “challenges”.
So what could give this pause? “Anything,” says Steven Goldberg on Kiplinger.com. Perhaps there will be a devaluation in an Asian currency, perhaps a massive corruption scandal in China, or perhaps we will see a lurch to the political left in Latin America. All are completely possible and all would be bad news for investors. And that’s why emerging markets are supposed to trade at a discount to emerged markets.
Published in Stock markets
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by
Annunziata Rees-Mogg
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