Thursday, December 16, 2010

Bloomberg: No Emerging Market Bears Unsettles Investors Shunning Conformity

Two points on this article from Bloomberg.  First, a theory can be correct conceptually but that does not mean asset prices must go up to reflect said theory.  Second, when everyone (and their mother) believes something - rarely does that thesis continue to make the crowd money.  For example "the internet will change the world" turned out to be very accurate when proposed in the late 1990s.   Second "invest in anything China as they are becoming a dominant force" is turning out to be very accurate, but didn't stop commodities and Chinese equities from going bust in 2008.  Wall Street is excellent at taking a viable thesis, and overdoing it to a point of massive excess.  And then things tend to go bust; even if the underlying thesis is 100% correct.

To that end, the Brazilian & Chinese markets have returned almost nothing in 2010.  But speaking more broadly - are there any emerging market bears in the world?  Not that there *should be* but again, when one side of the boat gets extremely heavy, bad things tend to (eventually) happen.  Timing 'eventually' is of course the trick.

Via Bloomberg:
  • Individual investors are pouring money into emerging-market stocks at the fastest pace since 2007 as the biggest rally in 16 years spurs three of the world’s largest banks to predict shares will hit record highs next year.  
  • The last time investors were this bullish, the MSCI Emerging Markets Index sank 11 percent in three months, data compiled by EPFR Global and Bloomberg show. The gauge trades for 2 times net assets, within 4 percent of the most expensive level on record versus the MSCI World Index of developed-nation shares, according to MSCI Inc. 
  • After all this money has flooded in, with everyone in love with them and all the euphoria surrounding them, it’s hard to find fundamental value,” said Harris Associates LP’s David Herro, who was named international stock fund manager of the decade this year by Morningstar Inc. “Growth in emerging markets is greatly helping the world, but you can overpay for it and that’s what’s happening.”  Moving away from the fastest- expanding economies puts Herro at odds with strategists from UBS AG to Citigroup Inc. 
  • Jack Ablin, the chief investment officer at Harris Private Bank who said emerging-market stocks were too expensive a month before they peaked in 2007, favors shares of U.S. companies that sell to developing nations.  “Yes, I believe that the emerging economies will outpace the developed world,” said Ablin, who helps oversee about $55 billion at the unit of Canada’s BMO Financial Group. “But I still don’t want to chase these valuations because a lot of optimism is priced in.”
  • Ablin of Harris Private Bank said a losing investment in Chinese stocks for his personal account in 1993 showed him that economic expansion doesn’t always translate into stock-market gains. While the Chinese economy posted average annual growth of 12 percent in the four years through 1996, trouncing the global rate of 3.1 percent, Ablin’s bet on the China Fund Inc lost 50 percent of its value.
    “I had pretty much bought into the consensus and I was late to the party,” he said. “That lesson told me there’s a big difference between the fundamental economic backdrop and the valuation of stocks.”

After a huge 2 year run for many of these markets, the investment banking performance chasers say 30% more to go next year!

  • Emerging-market stock strategists at UBS, Citigroup, JPMorgan Chase & Co., Credit Suisse Group AG and Morgan Stanley are more optimistic than their counterparts following the U.S. and Europe. The average of five estimates for the MSCI index next year is 1,463, or 30 percent higher than yesterday’s level and 9.3 percent above the all-time closing high on Oct. 29, 2007. 
  • The MSCI emerging-market index has surged 136 percent from its March 2009 low as developing economies exited the global recession in better shape than advanced countries by almost every measure. 
  • Government debt will probably amount to 37 percent of emerging-market gross domestic product next year and budget deficits will be 2.9 percent, compared with levels of 101 percent and 6.7 percent in advanced nations, the Washington- based International Monetary Fund predicts. 
  • Emerging economies may expand 6.4 percent in 2011, almost three times the 2.2 percent rate for developed nations.

And retail investors also see no potholes.
  • Emerging-market equity mutual funds are attracting money at an accelerating pace even after gains in the MSCI emerging markets index slowed to 13 percent this year from 75 percent in 2009. Inflows from individuals into funds during the past three months topped $12 billion, the highest level since the three- month period ended December 2007.
  • “Heavy inflows of equity capital into emerging markets suggest a more cautious stance is appropriate,” Ian Scott, the London-based global equity strategist at Nomura Holdings Inc., wrote in a Dec. 5 research report. He cut developing-nation stocks to “underweight” from “overweight,” saying they’re vulnerable to rising borrowing costs and capital controls. 
  • China’s central bank raised benchmark lending and deposit rates in October for the first time since 2007 and Indian policy makers have lifted interest rates interest rates six times in 2010.
  • Brazil raised taxes on foreign investments in fixed-income securities this year. Thailand removed a 15 percent tax exemption for foreigners on income from domestic bonds. Countries from Taiwan to South Korea have intervened in foreign- exchange markets to stem currency gains, according to traders.

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