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The flat returns for the last thirty and ninety
day periods include a complete market collapse followed by a partial
recovery. Just three short weeks ago, Europe (IEV) was down 14%,
Emerging Markets (EEM) 17%, Australia (EWA) and China (FXI) almost
20%, and S. Africa
(EZA) 25%, relative to their mid-July peaks. The reversal was rapid,
and many of the hardest hit indexes gained ten to fifteen percent by
the end of the August, only to stall in the first week of September.
China (FXI) and Hong Kong (EWH) shares are now higher than they
were prior to the sub-prime correction in mid-July, but they are
the exception to the rule. Most country indexes are still five to
eight percentage points lower, and a high level of uncertainty remains
in the market. Volatility is highest in emerging markets and 30-day
historic volatilities in the 40s and 50s are common. This is equivalent
to the volatility in a share of Goldman Sachs (GS) or Toll Brothers
(TOL).
While many predicted that a global flight to quality
would devastate emerging market shares, the opposite seems to be
happening. Over
the past ninety days, a +6.5% point performance advantage has emerged
between the Emerging Market index (EEM) and the Europe 350 (IEV).
This has helped two emerging market countries, S. Korea (EWY) and
Brazil (EWZ) move to the top of the rankings, as a result of both
their rapid rebound and their still very reasonable share valuations. |
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Over the past year, high earnings growth has helped
push share prices higher in all of the indexes studied. During that
period, earnings in emerging markets have increased almost 18%, as
compared to 11% for developed countries. This earnings growth, combined
with the recent price drop, has helped PE ratios remain at historically
low levels. The average PE ratio is only 13.2 for Europe (IEV), 15.3
for the USA (SPY), and 15.6 for Emerging markets (EEM).
In this graph the indexes of the world form an upward sloping line
as investors are willing to pay more for higher growth stocks. However,
two countries, Taiwan (EWT) and S. Africa (EZA), both located in
the lower right, have the highest earnings growth and may be 10%
to 20% undervalued based upon their relative positioning.
Some analysts have suggested that a bubble
is forming in emerging market shares given the extremely high returns
for the past year.
This may be true for China (FXI), but for other emerging markets,
the generally low PE ratios don’t support this thesis. While
persistent YoY share increases of 25-50% are not sustainable, the
current level of earnings growth and valuation appears reasonable
when compared to the broader markets. |
| METHODOLOGY: ETF
prices are compiled daily from Yahoo! Finance/Morningstar data.
Monthly valuation ratios
are used and then adjusted based on daily price changes. Correlations
are based upon one year, and volatility is based upon twenty-two
market days.
The scores from 0 (worst) to 4 (best) represent
the range (2 +/- 2 standard deviations) of normalized variables
for a category. For example, a valuation score of 3 for a country
indicates that the valuation variables (p/e, p/b, and p/cf)
equal-weighted, are one standard deviation better than the
average for the group.
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Disclosure: Authors may hold positions in ETFs named
