COLUMN-Why emerging markets still offer good stock bargains

Mon Jul 22, 2013 2:02pm EDT
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By John Wasik

CHICAGO, July 22 (Reuters) - There's been a lot to grumble about when it comes to Europe and emerging markets this year.

Most of Western and Southern Europe is still trying to dig out of a recession. Economic growth has eased in developing countries. And when the U.S. Federal Reserve hinted that it might back off its bond-buying program recently, equities in most emerging markets went into a funk.

But attractive valuations and some palpable signs of rebounds are boosting the fortunes of shares of non-U.S. companies, particularly in the emerging markets. If you don't have any stake in them, it's a good time to buy.

At first blush, the returns this year from the emerging markets don't exactly flash a buy signal. The iShares MSCI Emerging Markets exchange-traded fund, for example, is down 10 percent year-to-date through July 19; 4 percent of that loss occurred in the past three months. The fund invests in an index that represents major developing regions in Africa, Asia, Latin America and the Middle East.

Although equities in emerging markets are typically more volatile than the U.S. or Canada, they were hyper-sensitive to the Fed's wind-down announcement, which has since been softened by Chairman Ben Bernanke. The central bank may not put the brakes on its $85-billion-per-month bond buying program this year after all.

The beating that developing-country stocks took only made them better values. Since most economic forecasts have emerging markets growing this year, they offer some attractive valuations.

Alec Young, global equity strategist for S&P Capital IQ, told me the 12-month forward price-earnings ratio for emerging markets is 10, compared to around 14.5 for the S&P 500. That means investors see developing markets trading at a discount to the biggest U.S. stocks.   Continued...