Our lady’s not for turning

MoneyWeek is well-known for its ‘trades of the decade’. In 2000, Bill Bonner made a pretty simple one. Sell equities, buy gold. It was brilliant, and made a good few people pleasantly rich.

In 2010, Bill came up with ‘sell bonds, buy Japan’ for the simple reason that the latter was cheap and the former expensive. We liked that, but wanted something even simpler. So we chucked in another – ‘sell emerging markets, buy developed markets’.

At the time, we reckoned that developed markets looked significantly cheaper than emerging ones.

The market had recognised all the problems in the US and Europe (hence the prices), but was still allowing itself to believe that all was well in fast-growing Asia. We disagreed. We feared a new financial crisis in China, we worried about currency wars, about growth across Asia, about the general treatment of shareholders in some of the markets in question, and about price. That’s worked out pretty well in the last three years.

Emerging-market growth did start to fall in 2010; markets did start to recognise that prices were too high; and they have consistently underperformed developed markets ever since.

But here’s the thing: emerging markets aren’t expensive any more – they are verging on cheap. Look at it in pure price/earnings (p/e) terms, and the MSCI World Index is on about 14 times earnings, while emerging markets are on about ten times. Look at it on cyclically-adjusted p/es (Cape) and it looks even better.

I was asked at a lunch given by brokerage house CLSA this week what my trade of the decade would be if I could make it now, three years in. Making a new one three years rather than ten years after the first defeats the object, so I think I am not for turning (yet).

But having been very anti-emerging-market exposure for some time, I will suggest a little more strongly that anyone who likes to feel they are getting value buys some.

Emerging markets are not a homogenous or anywhere-near perfect group. But most aren’t as obviously weak as they were, say, in 1997. They have floating currencies, more reserves and less foreign-currency denominated debt (so it doesn’t matter quite as much if their currencies fall). They also have governments who have been here before.

I’m still holding a fair amount of cash (on the basis that there is a possible deflationary shock just around every corner and that much of the market is too complacent about the risks). But I’m also planning to buy a little more cheaper-than-ever Russia, some China and, for good measure, some of the Genesis Emerging Markets Investment Trust (LSE: GSS).

It has too high a management fee (1.5%), something the board should do something about sharpish. But it is invested in cheap places and trading at a discount of 8% to its net asset value. We like that.


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