Merryn's Blog

Should we pay more for emerging markets?

Emerging markets grow faster than developed ones. But should we really be paying a premium for them?

Does it make sense for emerging markets to be more expensive in valuation terms than developed markets? Much of the market would have you think so.

"Look at the growth", they say. "These markets are growing faster than developed markets so you should pay a premium for them." But this doesn't really make any sense. There have been endless studies showing that there is no connection between the economic growth of a single country and its stock market performance.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

But it is also the case that Asian stock markets are often not expensive at all. The cyclically-adjusted p/e (CAPE)of the Asia ex-Japan index has fallen to below 15 times three times since 1982, so it is hard to argue that it is always expensive.

At the same time, it is worth noting that the whole point of being an emerging market is to turn into a developed market. As CLSA's Russell Napier points out "a developed market is simply an emerging market that has gone right". And as an emerging market turns into a developed market, so the valuations investors pay for it will fall.

Advertisement
Advertisement - Article continues below

Let's not forget that the US was an emerging market around the turn of the last century. Yet anyone who invested then saw theCAPE ratiogradually fall over the next 20 years as it turned into a developed market: pay too much and you pretty much always lose money.

With that in mind, note that India is on a CAPE of 24.7 times, China is on 20.2 times, South Africa is on 22 times, Thailand is on 24 times and Chile is on 36.4 times. The long-term average for the US (since 1881) is 15 times. Something to point out to anyone trying to persuade you to put too much money directly into these markets.

At the moment, the only emerging market I am mildly interested in would be China. I'm not planning to invest in it (too opaque, too expensive and too dominated by quasi-state companies) but it will be interesting to see what happens to it as the Chinese property bubble bursts.

The Chinese can't get a real return on their deposits (thanks to a massive round of ongoing financial repression, savings rates are held well below inflation) so as the once-easy returns from property desert them, they might turn to the stock market instead.

That's something that would push up prices and allow Fidelity's Anthony Bolton to retire with his reputation intact and everyone else to take the chance to sell their holdings in his and other Chinese funds.

Advertisement

Recommended

Visit/investments/stockmarkets/600688/bullish-investors-return-to-emerging-markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Visit/519872/beware-the-hidden-risks-when-investing-in-emerging-markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Visit/517688/the-british-equity-market-is-shrinking
Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/517395/emerging-markets-buy-when-the-news-is-bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular

Visit/investments/commodities/silver-other-precious-metals/600812/buy-silver
Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
Visit/economy/600802/money-minute-wednesday-12-february-grim-times-for-european-industry
Economy

Money Minute Wednesday 12 February: grim times for European industry

Today's Money Minute previews industrial production in the eurozone, plus the latest from America's central bank.
12 Feb 2020
Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019