A lot of people are commenting on how the Emerging Markets are collapsing. Its not hard to see why with the crazy stock market and impending slowdown in China, instability in Thailand, the corruption scandals in Malaysia and the poor economic outlook of the other countries.
Sell first and think later is the watchword of the day.
And yet, by my measure, emerging market valuations are exceedingly cheap. And if we don’t buy when its cheap, when do we buy?
In the last post, I talked about how looking at the price levels are not an accurate gauge of how “expensive” or “cheap” a market is. It doesn’t take into account the economic activity over the years, reflected either through dividend payouts or increases in book value.
I am pretty bias towards the P/B ratio, just because it takes out a lot of the fluctuations in earnings. There maybe problems with it too, but I find it the best tool we have so far.
I remember back when I attended the London Value Investor Conference in May 2014, investors were already remarking that Emerging Markets were cheap relative to the rest of the world.
Where do we stand now?
Credit: JP Morgan
The data is from JPM. The data is accurate from the end of June 2015. It doesn’t take into account the subsequent decline in prices from July – August. The average P/B of the MSCI Emerging Markets stands at about 1.3x, a level not seen since 2009.
Credit: JP Morgan
What’s really interesting from the chart above is that the cheaper the P/B ratio, the better the subsequent returns in the next 12 months.
The data goes back all the way to 1995, and it takes into account the Asian Financial Crisis in 1997.
The returns are overwhelmingly positive, which makes sense to me, as values “mean-revert”. The probability of positive returns increase significantly as stocks get cheaper. The key word here is “probability”.
Of course stocks can get cheaper, but if they go down significantly in the next couple of months, we will be already approaching 1997 Levels.
How Cheap Will It Go?
The million dollar question. Unfortunately I have no idea. All I can say is stocks are getting much cheaper. More specifically, in the markets I operate in (Singapore, Hong Kong, South Korea and Japan), I am seeing plenty of value.
Some stock valuations are as cheap as when I was starting out in 2010 – 2011.
Its probably a good time to remember that market timing is not a pre-requisite of doing well in the market. Just look at the date of Warren Buffett’s famous “Buy America I Am” piece in October 2008.
He was a couple of months early too the bottom. But that wasn’t the point, it was that valuations were already becoming very attractive. Without the help of a crystal ball, I don’t think anyone really knows when the bottom is.
I know a couple of people who are waiting for the “all clear” to buy… but lets just take a look at some of the magazine covers during one of the greatest stock market rallies in history from. These are just a couple from 2009 – 2010:
I think it just goes to show how hard it is to predict the future. I will probably do a future post. Reading these articles written in the past are tremendous fun, as are the comments made then.
So I think stocks are pretty cheap across the board, and its time to go bargain hunting. Still, the news in the coming months will probably be pretty bad, and anyone looking to commit should steel themselves mentally and be prepared to look foolish in the face of a wall of negative press.