Tata's 23% Discount to Volkswagen Sparks Hunt for Emerging-Market Bargains
The biggest drop in emerging-market stocks since October 2008 is giving money managers the chance to find bargains in world-class companies from Sao Paulo to Moscow that are leading their peers in profit growth.
Itau Unibanco Holding SA, Latin America’s largest bank by market value, trades at a 75 percent discount to Wells Fargo & Co. as analysts say the Brazilian lender will increase profit three times faster. Tata Motors Ltd.’s price-to-earnings ratio is 23 percent less than Volkswagen AG’s even though profits at the Mumbai-based maker of the world’s cheapest car are rising twice as fast. OAO Rosneft, Russia’s largest oil producer, is valued at the lowest on record versus Canada’s EnCana Corp.
The rout that pushed down the MSCI Emerging Markets Index 9.2 percent last month, driven by concern Europe’s debt crisis will slow global growth and developing-nation earnings, left many companies undervalued, according to BlackRock Inc., Morgan Stanley and Templeton Asset Management Ltd. Low debt levels will help emerging economies to grow 5 percent a year even if Europe and the U.S. shrink, Ashmore Investment Management Ltd. said.
“The selloff was indiscriminate,” Ivo Kovachev, a senior emerging markets money manager in London at JO Hambro Capital Management Ltd., which oversees about $6.3 billion, said in a June 1 interview. “Often good companies went down together with the worse ones.”
Tata shares climbed 0.6 percent today and Rosneft fell 1.1 percent, while the MSCI emerging index slipped 1.2 percent. Emerging-market stocks were upgraded to “overweight” from “underweight” at HSBC Holdings Plc, which cited “very attractive” valuations in countries including Russia and Brazil in a research report today.
Profits for companies in the MSCI emerging gauge, which includes the so-called BRIC nations of Brazil, Russia, India and China, will climb about 30 percent this year, according to more than 2,000 analyst estimates compiled by Bloomberg. MSCI World Index companies are projected to report a 25 percent increase in earnings.
Stocks sank around the world this year on concern spending cuts by indebted European nations from Greece to Spain will erode demand for everything from Chinese manufactured goods to Russian oil. The MSCI World index fell 6.6 percent from the end of December through yesterday and trades for 13 times earnings estimates, according to Bloomberg data. The emerging index lost 6.5 percent and has a price-earnings ratio of 11.8, near the lowest level in 14 months.
Brazil’s Bovespa index fell 8.2 percent this year, while the MSCI China Index of Hong Kong-traded shares slid 8.9 percent and India’s Bombay Stock Exchange Sensitive Index retreated 2 percent. The Russian Micex Index declined 2.7 percent.
“In the very short term if people are foolish enough to sell some emerging markets, great,” Jerome Booth, who helps oversee about $33 billion as the London-based head of research at Ashmore, said in a May 25 interview. “It’s a buying opportunity for us.”
Emerging markets may be the hardest hit should the European debt crisis and the threat of increased financial regulation in the U.S. spur investors using borrowed money to reduce holdings of assets they consider riskier, according to HSBC Private Bank’s Arjuna Mahendran.
MSCI’s emerging-markets gauge underperformed advanced- nation shares during crises that sparked global losses during the past two decades from Latin America’s “Tequila Crisis” in 1994 to the U.S. subprime mortgage collapse of 2007. The peak- to-trough fall in the emerging-market index was 12 percentage points bigger on average during the six retreats, according to data compiled by Bloomberg.
“Trades are being unwound,” Mahendran, an investment strategist at HSBC Private Bank in Singapore, said in a May 21 interview with Bloomberg Television. “This is not going to end in a hurry.”
Emerging-market shares now have cheaper valuations than during previous crises, Bloomberg data show. The emerging index traded at about 17 times profits before the mortgage collapse in 2007, 30 times before the dot-com bubble popped in 2000 and 19 times before the Asian financial crisis of 1997.
Itau, Wells Fargo
Emerging-market debt as a percentage of gross domestic product is estimated to reach 39.6 percent this year, near 2007 levels, while the ratio in the U.S. will surge to 93.6 percent in 2010 from 61.9 percent in 2007, the Washington-based International Monetary Fund forecast in November.
Dan Tubbs, BlackRock’s emerging markets money manager, said he’s been purchasing shares of Brazilian financial and consumer companies and may increase positions in China and Russia. Itau was the fifth-largest holding in the BlackRock Emerging Markets Fund at the end of April.
“You’ve got better earnings growth and cheaper valuations,” Tubbs, who helps oversee about $2 billion in London, said in a May 21 interview. “Markets will tend to rise to reflect the improving fundamentals of the economy.”
Itau, based in Sao Paulo, dropped 9.6 percent this year, compared with a 6.9 percent gain at Wells Fargo. Analysts project profits at Itau will increase at an annual rate of about 17 percent for the next three to five years, compared with 5.3 percent growth for Wells Fargo, Bloomberg data show.
Itau’s PEG ratio, which compares a stock’s price-earnings ratio with projected profit growth, is 0.7 versus 2.7 for San Francisco-based Wells Fargo, according to data compiled by Bloomberg. JPMorgan Chase & Co. of New York upgraded Itau to “overweight” from “neutral” last month, citing an attractive valuation, higher profitability than peers and a “leading franchise.”
Tata is valued at 14 times earnings estimates and is forecast to increase profit by 145 percent this fiscal year. That compares with a price-earnings ratio of 18 for Wolfsburg, Germany-based Volkswagen, where earnings may climb 52 percent, the average of analysts’ estimates shows.
Tata said on June 2 it opened a plant for the $2,500 Nano model that will help clear a backlog of orders in India, where the government estimates car demand may more than double to 3 million annually by 2015 as the economy expands and incomes rise. Tata shares may climb 14 percent in the next 12 months, according to the average of 35 analysts’ estimates compiled by Bloomberg.
“It has enormous upside,” Seth Freeman, chief executive officer at San Francisco-based EM Capital Management LLC, said in a May 28 interview with Bloomberg Television.
Rosneft’s earnings are poised to rise about 50 percent this year while Calgary-based EnCana’s retreat 50 percent, according to the average of analysts’ estimates. Analyst Matthew Thomas of New York-based Morgan Stanley wrote in a May 25 research report that recent declines provide an “excellent opportunity” to buy shares, with his $10 price target 39 percent higher than yesterday’s closing level.
Shares of Moscow-based Rosneft are a top pick of Morgan Stanley’s chief Asian and emerging-market strategist Jonathan Garner, who recommended adding to Russian holdings last week.
Pacific Sun Investment Management Ltd.’s Andy Mantel says shares of China Green Holdings Ltd. are attractive after the Hong Kong-based supplier of fruits and vegetables sank 17 percent last month. The company has an estimated price-earnings ratio of 9, compared with an average of 23 for its global peers. The shares are 30 percent undervalued, according to the average of five analysts’ price estimates compiled by Bloomberg.
“It’s very cheap,” Mantel, the Hong Kong-based founder and managing director of Pacific Sun Investment, said in a May 25 interview with Bloomberg television. His China Mantou fund outperformed 88 percent of peers the past year, Bloomberg data show.
Templeton Asset Management’s Mark Mobius says developing- nation equities are still in a bull market and declines spurred by Europe’s debt crisis are providing opportunities to buy.
“We want to be invested,” Mobius, who oversees about $34 billion as chairman of Templeton in Singapore, said in a May 26 interview. “The fundamentals are much better than people realize.”