In The News
Global funds seen as strong value
Morgan Stanley says Exchange Traded Funds good way into emerging markets Brazil, Turkey, Russia.
8/24/2004
By Steve Hays
Reuters
Stocks in so-called emerging markets appear compellingly cheap versus other markets and a growing number of Exchange Traded Funds allow investors a simple way to get in, Morgan Stanley said.
The price/earnings ratio of emerging market stocks for the next 12 months is 8.8. Since 1994 they have only been cheaper, and only modestly so, on two occasions in October, 2002 at 8.2 and in March, 2003 at 8.3, Morgan Stanley global asset allocation strategist, Hernando Cortina said in a research note.
With the MSCI World stocks index trading at a forward p/e of 15.1, emerging markets' discount to developed markets stands at 42 percent. Though not as extreme as the record 55 percent discount of November 2001, the current discount compares favorably with the average discount of 29 percent since 1994, Morgan Stanley said.
"Something usually needs to go wrong to drive an asset's valuation to near its historical trough. In the case of emerging markets, however, more things appear to be going right than wrong, making trough valuations especially puzzling," it added.
"The usual cases for trough valuations -- broad macro crises or an earnings collapse -- are not in the picture."
Morgan Stanley said there is also a strong disconnect between tight emerging market debt spreads and low equity valuations, with debt trading at the narrowest spread since 1997 suggesting a constructive macro economic outlook.
Low p/e ratios may represent an overreaction to U.S. interest rate rises or are discounting a much harsher global economic outlook for 2005 than the investment bank forecasts.
But Morgan Stanley chief economist Steven Roach is increasingly concerned over a possible global recessionary relapse in 2005, in large part driven by high oil prices. Emerging markets' return on equity (ROE) at 13.9 percent is at an historic high and worldwide is second only to the U.S., possibly due to countries' improved macro economic stability and greater capital discipline since 1998. Morgan Stanley expects emerging markets' earnings growth of 30 percent this year, the highest after Japan, but sees a significant slowdown to a more sustainable pace of 5-10 percent in 2005. Its preferred equity markets are Brazil, Turkey, non-energy Russian stocks and South Korea.
ETFs offer emerging market exposure
Exchange Traded Funds, which are traded like equities, but track an index without the investor having to buy all an index's components, increasingly offer a simple and cheap way for investors to get an exposure to sometimes challenging emerging markets, Deborah Fuhr, ETF strategist at Morgan Stanley said.
ETFs can be used just like stock index futures in markets where futures aren't available or aren't very liquid and enable fund managers to invest large amounts of capital in a sector in one block.
The expense ratios of ETFs are also significantly lower than those of actively managed mutual funds as they typically have much lower portfolio and investment turnover, which leads to lower internal transaction processing costs.
But ETF investors generally have to pay commissions when they buy or sell shares.
Fuhr said average global daily trading volumes in ETFs across all markets have risen 37.8 percent since the start of the year to $11.9 billion or 237 million shares.
There are 23 ETFs which offer exposure to emerging market equities worldwide and five more are planned this year including: ishares FTSE/Xinhua Hong China 25 index, PowerShares Halter Golden Dragon China Portfolio and Vanguard Emerging Markets Stock Index Fund in the U.S.
In China there are also the Shanghai 50 A Index and the Shanghai 180 A Index ETFs.
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