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UBS Sees `Attractive Opportunity' in Emerging Markets on Current Valuation
Developing-nation stocks offer investors an “attractive opportunity” at current valuations, led by Russia, China and Brazil, according to UBS AG.
Global emerging market, or GEM, stocks are trading at 10.5 times estimated earnings over the next 12 months, UBS strategists led by Nicholas Smithie wrote in a report yesterday. That’s lower than their long-term average of 13.3 times and cheaper than the MSCI World Index’s multiple of 12.1 times, according to the brokerage.
“The GEM universe looks a lot stronger than the developed world in many respects,” Smithie wrote. “We do not think a discount valuation to the World is justified and expect multiples to converge over time, offering support for GEM performance.”
The MSCI Emerging Markets Index has climbed 16 percent from this year’s low set on May 25, helping to erase its 2010 loss. That’s outpaced the MSCI World Index of developed nations, which has fallen 3.6 percent this year amid Europe’s sovereign-debt crisis.
A “fair” price-to-earnings multiple for global emerging markets would be around 15 times, which may be “ambitious” given current valuations, according to the report.
Still, its average multiple of 13.3 times suggests the MSCI index may climb to 1,264, near its October 2007 record high of 1,338.49, the strategist said, without giving a time frame.
Smithie, who joined UBS in May, said the brokerage’s top pick among developing nations is Russia, which offers the lowest valuations relative to the MSCI Emerging Markets Index and given its “sustainable” growth and earnings recovery.
BRICs
He also favors shares in China, saying that fears of a so- called hard landing are “overblown,” and Brazil, which offers “superior growth, investment grade quality at a compelling valuation.”
Asia ex-Japan emerging-market equity funds received more than $1 billion last week, the strongest inflows in 14 weeks, EPFR Global said today.
The outlook for domestic consumption means the largest developing nations including Russia, Brazil and China should continue to prosper, according to HSBC Global Asset Management Ltd. Valuations for the BRIC markets, which also includes India, are now back at “fair” levels, and current prices present a “good entry opportunity for investors with a long-term investment horizon,” the investment company said.
“Rising affluence is fuelling growing demand for goods,” Nick Timberlake, head of emerging market equities at HSBC Global Asset, said in an e-mailed statement yesterday. “The BRIC markets are no longer as dependent on the developed world.”
UBS’s least-preferred countries are Poland, Hungary, South Korea and Taiwan, according to the report, which said the Eastern European nations offer “low growth” and the risk of a “sharp” slowing in growth momentum in 2011 to the two Asian markets.
To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net
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