Oct. 30 (Bloomberg) -- This year’s 62 percent surge in the benchmark index for emerging-market stocks is turning Avon Products Inc. into a relative bargain as investors hunt for companies that make most of their money in developing countries.

Avon, the New York-based cosmetics company, is valued at a 13 percent discount to Brazil’s Natura Cosmeticos SA, though analysts say earnings will grow three times faster through 2011. Standard Chartered Plc, the U.K. lender in India since 1858, trades at 2.1 times net assets, versus 3.6 for Mumbai-based HDFC Bank Ltd. China’s Anhui Conch Cement Co. is valued at a 21 percent premium to Paris-based Lafarge SA, whose Asian sales are expanding more rapidly.

The MSCI Emerging Markets Index trades near the highest level compared with the MSCI World Index since at least 1995 after the steepest rally in 10 years. Now, with shares falling in Brazil, India and China, investors are looking for cheaper alternatives in advanced economies. Brazil’s Bovespa stock index entered a so-called correction this week, plunging more than 10 percent from its 16-month peak on Oct. 19.

“Valuations in some of these emerging markets are getting pricey,” said Lei Wang, the Santa Fe, New Mexico-based co- manager of the $16.2 billion Thornburg International Value Fund, which beat 92 percent of its peers the past five years. “People are so focused on the emerging markets that they forgot there are companies in Europe and the U.S. that sell into these markets.”

Valuation Gap

Wang, whose fund invests in developing and advanced countries, has been adding to holdings of companies such as Lafarge with growing sales in emerging markets. At least 15 of the 500 biggest companies in the MSCI World Index of developed nations that disclose sales by country get more than half their revenue from less evolved markets, according to data compiled by Bloomberg. They trade at an average 12.6 times 2010 earnings estimates, less than the 17.1 ratio for the world index and 15.2 times for the developing-markets measure, the data show.

The MSCI emerging index is valued at 2 times its companies’ reported net assets, compared with 1.7 times for the MSCI World, near the widest gap since Bloomberg began compiling monthly data 14 years ago. The MSCI World added 23 percent this year, trailing the developing gauge by the widest margin since 1999.

The MSCI emerging gauge added 0.3 percent as of 1:53 p.m. in London, extending this month’s advance to 1.1 percent. The MSCI world fell 0.4 percent, erasing October’s gain.

Investors put $73 billion into emerging-market equity funds in 2009 while pulling $77 billion from developed-nation funds, data from Cambridge, Massachusetts-based EPFR Global show.

Emerging Growth

The less advanced markets are leading the global economy out of its first recession since World War II as gains in raw materials from oil to copper boost earnings from producers such as Brazil. Stimulus plans led by China’s 4 trillion-yuan ($586 billion) package are fueling demand for real estate, automobiles and appliances.

Developing economies will expand 5.1 percent as a group next year, compared with 1.3 percent in advanced countries, where rising savings rates and unemployment stifle growth, according to the Washington-based International Monetary Fund.

“The emerging countries haven’t got these same issues as the developed world,” said Stephen Docherty, an Edinburgh money manager who holds shares of London-based Standard Chartered for the $1.3 billion Aberdeen World Equity Fund, which beat 94 percent of its peers the past five years.

Developed-World Drag

Operations in the developed world are proving a drag on Lafarge and Avon. The cement maker posted a 122 million-euro ($181 million) operating loss from its North American business in the first half, while earnings in Africa jumped 27 percent. Avon’s third-quarter revenue in North America slid 8 percent, compared with a 22 percent gain in Brazil.

Demand from advanced nations will recover as economies exit recession, said Thornburg’s Wang. U.S. gross domestic product expanded at a 3.5 percent pace from July through September, exceeding the median estimate of economists surveyed by Bloomberg News, after shrinking in the previous four quarters, figures from the Commerce Department showed yesterday.

Julian Mayo, investment director at Charlemagne Capital in London, said companies with emerging-market businesses that are listed in advanced nations may have the attraction of more trading and greater transparency in financial reporting than some developing-market companies.

Mayo, who helps oversee almost $3 billion, holds shares of First Quantum Minerals Ltd., a Vancouver-based mining company that has most of its operations in Africa. More than 550,000 First Quantum shares changed hands on Canadian exchanges yesterday. That compares with the 158,101 total volume of all stocks traded on the Lusaka Stock Exchange in Zambia, where First Quantum gets about 62 percent of its sales.

BRIC Selloff

Buying companies in advanced markets allows investors to reduce the risks of currencies in the less evolved countries. Brazil’s real climbed 34 percent this year against the dollar, the biggest gain among the 16 most-traded currencies. The South African rand rose 22 percent.

“In general I’d far rather be exposed to the global emerging markets growth story through developed-market stocks,” said John-Paul Smith, a strategist in London at Pictet Asset Management, which oversees $120 billion.

Developing-nation equities tumbled the past two weeks as Brazil’s government imposed a 2 percent tax on international purchases of stocks, India began withdrawing its record monetary stimulus and China said it plans to tighten rules on personal loans. The MSCI BRIC Index of the four largest emerging markets sank 6 percent from a 13-month high on Oct. 19.

Avon Calling

Avon, which sells its anti-aging creams, shampoos and perfumes through 5.8 million sales representatives in more than 100 countries, is one of 50 U.S. companies recommended by Goldman Sachs Group Inc.’s New York-based strategist David Kostin because of its sales in the biggest emerging markets.

The basket of stocks, which also includes crop-nutrient producer Mosaic Co. and fast-food retailer Yum! Brands Inc., had faster revenue growth than the Standard & Poor’s 500 Index during the past 10 quarters and beat analysts’ estimates during nine of those periods, according to Kostin.

Avon may post 75 percent profit growth over the next two years, compared with 23 percent at Natura, Brazil’s biggest cosmetics maker, according to analysts’ estimates compiled by Bloomberg. Avon posted third-quarter earnings per share yesterday that topped analysts’ estimates. The shares rose 0.1 percent today, bringing this year’s gain to 36 percent. Cajamar- based Natura climbed 1.2 percent, extending the advance this year to 68 percent.

Lafarge, Anhui

Lafarge, whose cement and concrete has helped build emerging-market projects from the Sungai Prai Bridge on the west coast of Malaysia to a sports stadium on the outskirts of Rio de Janeiro, trades for 12.7 times next year’s earnings estimates, compared with 16.1 times for Anhui Conch, China’s biggest cement maker by market value.

Sales in Asia climbed 22 percent at Lafarge in the first half of 2009, compared with 10 percent at Anhui Conch. The French company got about 53 percent of sales from the Middle East, central and eastern Europe, Latin America and Asia in the first six months of 2009. Wang of Thornburg predicts emerging markets may account for almost 75 percent of Lafarge’s sales in two years. Lafarge shares fell 1.7 percent to 57.01 euros today.

While shares of Standard Chartered surged 98 percent since global equities bottomed on March 9, the rally trailed the 118 percent gain in the MSCI Emerging Markets Financials Index.

Standard Chartered, which has businesses ranging from wealth management to Islamic finance, may increase its book value by 17 percent from 2009 to 2011, compared with a 23 percent gain for the MSCI financials index, according to analysts’ estimates compiled by Bloomberg. The company has plans to hire 850 people to expand its private banking business in Asia, which the IMF says will be the world’s fastest growing region next year.

Standard Chartered shares added 0.4 percent to 1,542.5 pence today.

“Valuation-wise, Standard Chartered looks a lot cheaper” than many emerging-market banks, said Aberdeen’s Docherty. “The company remains well run and has exposure to faster-growing regions,” he said.

     The following 15 of the 500 biggest companies in the MSCI
World Index that disclose sales by country get at least half of
their revenue from developing nations, according to Bloomberg
data:

Anheuser-Busch InBev NV
AES Corp.
Avon Products Inc.
British American Tobacco Plc
Ericsson AB
Erste Group Bank AG
Lafarge SA
Mosaic Co.
Noble Corp.
Old Mutual Plc
Philip Morris International Inc.
SABMiller Plc
Saipem SpA
Standard Chartered Plc
Technip SA

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.

Last Updated: October 30, 2009 10:00 EDT