{"id":31386,"date":"2012-08-06T00:10:38","date_gmt":"2012-08-06T00:10:38","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/08\/emerging-markets-opportunities-and-pitfalls\/"},"modified":"2012-08-06T00:10:38","modified_gmt":"2012-08-06T00:10:38","slug":"emerging-markets-opportunities-and-pitfalls","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/08\/06\/emerging-markets-opportunities-and-pitfalls\/","title":{"rendered":"Emerging Markets: Opportunities and Pitfalls"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

As I write this article, 670 million people are without electricity in India.<\/p>\n

Stop and think about that for a minute.\u00a0 That\u2019s nearly double the population of the United States, and none of them have had electricity for the better part of two days.\u00a0 Some homes and businesses have backup generators, but the vast majority of those affected were quite literally left in the dark.\u00a0 Needless to say, business productivity has ground to a halt.<\/p>\n

In a completely unrelated story, Turkish mobile telecom giant Turkcell ($<\/span>TKC<\/a>)<\/strong> released second quarter results<\/a> last week that sent shares up sharply\u2026even while the company hasn\u2019t paid a dividend in over two years due to a boardroom dispute that could pass for an episode of the Jerry Springer Show.<\/p>\n

Turkcell\u2019s board is so bitterly divided that they can\u2019t even properly schedule a shareholder meeting, and the Turkish state is threatening to intervene to break a legal deadlock that have involved courtrooms on three continents.\u00a0 At one point, it was even being debated by Queen Elizabeth II\u2019s Privy Council.<\/p>\n

This is not a third-world, basket-case company.\u00a0 Turkcell is one of the most respected mobile carriers in the world and routinely wins awards in Europe for its service quality.\u00a0 And yet a boardroom circus like this can happen even at Turkcell.<\/p>\n

Why do I bring up these two stories?\u00a0 Because they illustrates both the risks and opportunities presented to investors by emerging markets.<\/p>\n

Emerging markets are, by definition, not emerged.\u00a0 They\u2019re still a little rough around the edges and, frankly, investors should expect setbacks along the way.\u00a0 The added risk is the price you pay for the expectation of higher returns.<\/p>\n

Emerging market equities have not performed well in 2012, as slower growth in China, India, and Brazil have sapped investor enthusiasm.\u00a0 The iShares MSCI Emerging Markets ETF ($<\/span>EEM<\/a>)<\/strong>, which many use as a proxy for emerging markets in general, is down 16% over the past 12 months.<\/p>\n\n\n\n\n\n\n\n\n\n
\n

Emerging Market<\/strong><\/p>\n<\/td>\n

\n

P\/E Ratio<\/strong><\/p>\n<\/td>\n

\n

Dividend Yield<\/strong><\/p>\n<\/td>\n<\/tr>\n

Brazil<\/td>\n\n

11.5<\/p>\n<\/td>\n

\n

3.9%<\/p>\n<\/td>\n<\/tr>\n

China<\/td>\n\n

7.1<\/p>\n<\/td>\n

\n

4.4%<\/p>\n<\/td>\n<\/tr>\n

Colombia<\/td>\n\n

15.0<\/p>\n<\/td>\n

\n

2.8%<\/p>\n<\/td>\n<\/tr>\n

India<\/td>\n\n

16.5<\/p>\n<\/td>\n

\n

1.7%<\/p>\n<\/td>\n<\/tr>\n

Peru<\/td>\n\n

37.0<\/p>\n<\/td>\n

\n

5.1%<\/p>\n<\/td>\n<\/tr>\n

Turkey<\/td>\n\n

10.9<\/p>\n<\/td>\n

\n

2.3%<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Source: Financial Times<\/em>, July 31, 2012<\/p>\n

Looking at a sample of emerging market indices, we see significant differences in prices.\u00a0 Chinese shares, at 7 times earnings, are almost shockingly cheap, and Brazil and Turkey are priced attractively as well at 11.5 and 10.9 times earnings, respectively.<\/p>\n

At the other end of the spectrum, Peru is trading at levels reminiscent of the 1990s tech bubble at 37 times earnings, and Colombia and India are comparatively expensive (at least relative to China, Brazil and Turkey) at 15.0 and 16.5 times earnings.<\/p>\n

A summary comparison of emerging market stock prices does not constitute a comprehensive analysis, but one point is clear.\u00a0 Outside of a few outliers, emerging market equities are cheap relative to their prices of recent years and relative to developed markets.\u00a0 Investors, by and large, have fallen out of love with them as an asset class.<\/p>\n

Barring a destabilizing meltdown in the Eurozone, I expect to see emerging market equities finish 2012 strongly.\u00a0 The time to buy them is when they are cheap and unloved\u2014as they certainly are today.<\/p>\n

Disclosures: Sizemore Capital is long TKC.\u00a0 This article first appeared on MarketWatch<\/a>.<\/em><\/p>\n

Related posts:<\/p>\n