• Silke Lauenstein

If not now, when?

046 048 Wasserglas pw Schwellenland 11 2018 final

Emerging market equities are now very attractive after the sometimes sharp price declines, says Michael Keppler of Keppler Asset Management Inc. New York. Now is a good time to invest.

There are myths in the capital markets that are told over and over again. One is that a strong US dollar and/or rising US interest rates are fundamentally bad for emerging market equities, because companies there then groan under their dollar debt and international investors tend to withdraw their capital towards the US.

That sounds logical, but it's not. First, most emerging markets are no longer as heavily indebted in US dollars as they used to be. Secondly, all commodity exporters - one example is Russia - will benefit even if the "greenback" becomes stronger. Because then they earn im Export more.

Nor does the flow of capital necessarily have to change. After all, for international investors there is one aspect that counts most: how attractive different investments are compared to each other. I'm doing the same thing. Ich buy where I have to pay the least for my share of the future profits of a company.

This comparison currently clearly speaks in favour of emerging market equities. We regularly analyse the valuation ratios of the MSCI Emerging Markets and the MSCI World. The price/book value ratio (PBC) of the emerging market index is currently 1.5, below the long-term average. Beim MSCI World, this figure is 2.3 - which is above the long-term average in the past.

The relationship between share price and cash flow is similar. Here, the MSCI Emerging Markets comes to a value below the historical average of 7.9. Shares from the industrialized countries bring this figure to 11.3. The comparison of the price-earnings ratios (P/E ratios) is corresponding. With a P/E ratio of 12.3, the emerging markets currently have a considerable discount of 17.9 on the MSCI World. And finally, the emerging markets are also significantly more attractive than the equity markets of the developed economies in terms of dividend yields. I get three percent here and only 2.5 percent there. If I take everything together, I currently calculate a valuation advantage of more than 25 percent for the emerging markets compared with the industrialized country exchanges. This is how large the gap was last in the middle of the past decade - shortly before the emerging markets began to catch up.

It is also interesting to note that the profitability of companies in the emerging markets has improved significantly in recent years. Today, both the cash flow and the return on equity are on average almost at the level of companies from the industrialised countries. For this reason, a valuation discount on the asset class is not necessarily justified.

It becomes even more attractive if you - like the Global Advantage Emerging Markets High Value Fund managed by Keppler - invest in the cheapest markets Brazil,  China,  Chile, Colombia, Korea, Malaysia, Poland, Russia, Taiwan, the Czech Republic and Turkey.

Taken together, these markets currently have a PER of 1.1. In contrast, the P/E ratio for growth equities from the emerging markets is 2.7, more than 2.5 times as high. And the P/E ratio there is also twice as high as in the value markets. Another myth is that this premium is justified because growth stocks show a much stronger increase in profits. In fact, value equities posted profit growth of 14.8 percent, which is only marginally below the 16.5 percent profit growth of their growth counterparts. Value stocks thus deliver earnings growth similar to that of growth stocks - but at half the price.

If investors are more oriented towards hard facts and less towards myths, financial flows will also move in the direction of emerging markets. Of course, the shares can also become even cheaper there. In my view, however, the danger that investors will miss a very favourable entry point is greater. So, start investing now. ®

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