Emerging Markets Getting Whacked... Russia Facing Big Sell Off
The so-called decoupling theory has completely fallen by the wayside. Some people consider the theory to apply to economics (i.e. economies are decoupled) while others apply it to capital markets (i.e. stock and bond markets are decoupled.) Well, regardless of which one you look at, they have both completely fallen apart. A good example as mentioned by FT Alphaville is the Russian market. Supposedly the local market was halted after dropping 17%. Russia has big political risk but if contrarians may want to start looking at it.
According to a commentator from the linked blog post, Russia's local market P/E has dropped from 7.57 a week ago to 5.25 now. Any market, regardless of where it is, with a P/E of around 3 or 4 is worth looking at. However, do keep in mind there is big political risk with property rights (on par with most African or Asian countries I would say) and most of the market is composed of commodity cyclicals. The latter point means that low P/Es may simply indicate unsustainably high earnings, rather than low prices.
The following is a chart of YTD stock returns for various exchanges of the world:
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I didn't spend much time so these charts are in local currency terms. One should really look at returns in the same currency. I suspect that the foreign returns will be even worse if you price in the same currency (since US$ strengthened this year). If you ever wanted to invest in emerging markets but felt the valuations were high, now may be a time to start looking. As is generally the case, there is bound to be some blow-ups so one needs to be careful. My feeling is that there is going to be a blow up in the emerging market debt of some country. I don't know what that country is but risk spreads have been very low over the last few years so it is almost inevitable in my eyes. If an emerging market defaults on its debt or runs into financial problems (which usually means letting inflation run wild in order to pay off foreign debt,) all other EM countries will get hit.
If the world goes into a slowdown, capital flight to USA is the most likely scenario (this is what has been happening lately.) Some people seem surprised that the US$ has rallied but this is basically capital flight. I expect the Japanese Yen to strengthen as well.
According to a commentator from the linked blog post, Russia's local market P/E has dropped from 7.57 a week ago to 5.25 now. Any market, regardless of where it is, with a P/E of around 3 or 4 is worth looking at. However, do keep in mind there is big political risk with property rights (on par with most African or Asian countries I would say) and most of the market is composed of commodity cyclicals. The latter point means that low P/Es may simply indicate unsustainably high earnings, rather than low prices.
The following is a chart of YTD stock returns for various exchanges of the world:
.png)
I didn't spend much time so these charts are in local currency terms. One should really look at returns in the same currency. I suspect that the foreign returns will be even worse if you price in the same currency (since US$ strengthened this year). If you ever wanted to invest in emerging markets but felt the valuations were high, now may be a time to start looking. As is generally the case, there is bound to be some blow-ups so one needs to be careful. My feeling is that there is going to be a blow up in the emerging market debt of some country. I don't know what that country is but risk spreads have been very low over the last few years so it is almost inevitable in my eyes. If an emerging market defaults on its debt or runs into financial problems (which usually means letting inflation run wild in order to pay off foreign debt,) all other EM countries will get hit.
If the world goes into a slowdown, capital flight to USA is the most likely scenario (this is what has been happening lately.) Some people seem surprised that the US$ has rallied but this is basically capital flight. I expect the Japanese Yen to strengthen as well.
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