Plummeting Prices Make Chinese and Other Asian Stocks More Attractive

October 6th, 2008

Plummeting Prices Make Chinese and Other Asian Stocks More Attractive

Hello again,

This is the first time I’ve posted twice in one day, but I hope to continue to provide additional information here in light of the financial crisis.

Barron’s released an article on September 29th entitled “It’s Time to Revisit Emerging Markets.” I’ll get more into their rationale, but the gist is that EM stocks (especially in China and Asia), have fallen so much while maintaining positive debt ratios, that they are looking like good buys since they are quite cheap.

The article cites that “Brazil is off 23%, Mexico 13%, Russia 43%, China 16%, and Korea 12%… since July.” While in reality, after the turbulence today, Emerginvest’s heat map cites that it is even more egregious: in the last quarter, Brazil is down 25%, Mexico 18.9%, Russia 51%, China 22%, etc. compared to the recent downturn where the U.S. is down by 16.4% for the quarter.

Ironically however, that only strengthens the article’s argument. It describes how Mohammed El-Erian, the co-CIO of PIMCO (who also happens to be an emerging markets expert), is still quite optimistic about emerging markets returns. He states: “Technically, you’ll see an even sharper rally in emerging markets than U.S. equities. I’d at this point be looking to buy the [MSCI Emerging Markets] index.” (EEM) The article fully admits that emerging markets will be affected, however it states that Morgan Stanley believes it will slow to somewhere around 7% growth in the first part of ‘09.

It cited how the MSCI index was trading at a 10.9-x multiple of trailing earnings, the lowest valuation of the last 7 years. In addition, it discusses how projections of the continued growth of emerging markets (contrasted with developed markets attempting to dig themselves out of the credit crisis for the foreseeable future) compliments the cheap prices: “David Fisher, chairman of Capital Group, recently said he expects 70% of the world’s growth over the next two decades to come from the emerging markets. At the moment, they account for just 11% of the world’s stock-market value, even though JPMorgan Chase reckons they’ll account for 28% of the global economy next year.”

It advises that many (if not all) of the emerging market opportunities look interesting, yet points to Asia (ADRA)and China (FXI) specifically. One method it used to select attractive indexes/countries was to consider their loan-to-deposit ratio. They say if it’s “over 100%, there’s a very high probability the whole country will need to delever.” Using this metric it picks out Hong Kong (57.4%), China (65%), Indonesia (72%), the Philippines (73%), Malaysia (74%), and Taiwan (78%), yet specifically points to China (FXI)(how it dropped due to inflation fears, but those have diminished and might expect a rebound). It singles out China Mobile (CHL) as an example of a company which has dropped significantly (43%) of its share price, but has continued to grow revenue and margins.

Underlying this argument is that since many of the debt ratios of Asian countries in particular (in addition to some strong growth prospects), they won’t have the same credit problems internally as many developed markets will. In addition, with today’s heavy downswing, they might look like attractive options.

Well, hope you enjoy and look forward to writing more later.

Best,
Jonathan

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