When Antoine van Agtmael was traveling around Asia in the late 1970s, he became convinced there were companies worth investing in throughout the developing region. In 1981, while working for the World Bank’s International Finance Corp., he presented an idea for a “third-world equity fund” to Salomon Brothers Inc.
“They told me we would never sell this fund,” van Agtmael says, Bloomberg Markets magazine reports in its March issue. “They wanted a more-uplifting name. That’s how we came up with the term emerging.”
Today, van Agtmael remains bullish on what everyone now calls emerging markets.
“As a group, they’re now as attractive as I have seen them, on both a historic and comparative basis, at any time in the last 25 years,” says van Agtmael, who oversees $7.4 billion in emerging-markets equities at Ashmore EMM LLC in Arlington, Virginia. He’s looking in particular at shares of companies in China and the Middle East.
That’s in line with the results of Bloomberg Markets’ first ranking of the most-promising emerging and frontier markets for investors. China topped the list, which is based on more than a dozen measures of the investing climate, from forecast gross domestic product growth to the ease of doing business. China was followed by Thailand, Peru and Chile.
Leading Frontier Markets
Vietnam ranked first among the frontier markets, which index providers consider too small or illiquid for most investors. The United Arab Emirates came in second, while Bulgaria and Romania tied for third place.
As the world’s second-largest economy, China commands the attention of investors even though the International Monetary Fund projects that its growth will slow during the next five years.
After decades of topping 10 percent annually, China will expand at an average pace of 9.4 percent from 2012 to 2016, the IMF forecast in September. That still outpaces any other country in the ranking. China’s low government debt -- 16 percent of GDP compared with 45.3 percent for No. 2 Thailand -- and cheap equity valuations helped secure its top spot among emerging markets.
The other three so-called BRIC countries -- Brazil, Russia and India -- didn’t fare as well. Russia ranked No. 8, while India and Brazil failed to make the top 10.
India, in 15th place, was hurt partly by surging consumer prices and stocks that are expensive compared with those in the MSCI Emerging Markets Index. As of year-end, the Indian stock market’s price-earnings ratio was 14.1 compared with 10.6 for the index.
In Brazil, which ranked 16th, the economy shrank in the third quarter for the first time in more than two years as falling commodities prices eroded export earnings and Europe’s debt crisis hurt business confidence.
“Each of them are starting this year off with their own challenges,” says Jim O’Neill, chairman of Goldman Sachs Group Inc.’s asset management unit in London, who coined the term BRIC a decade ago. “But I don’t see any of them being life threatening.”
Thailand scored well because it’s attracting investors with its agricultural wealth and industrious workforce. Peru, which has grown an average of 5.7 percent annually during the past decade, will benefit from a surge in consumer spending across South America, says Mark Mobius, who oversees about $45 billion as executive chairman of San Mateo, California-based Templeton Emerging Markets Group. He has been buying Peruvian shares.
The leading country among frontier markets has been expanding faster than most emerging markets. Vietnam’s GDP has grown 7.2 percent annually on average since 2000. Still, the country’s benchmark VN Index tumbled 27 percent in 2011 as consumer prices surged as much as 23 percent, the fastest pace in Asia.
Stocks in the emirates of Dubai and Abu Dhabi trade at some of the cheapest levels worldwide. The Dubai Financial Market General Index was valued at 6.7 times analysts’ profit estimates at year-end, while the ADX General Index traded for 7.5 times, compared with a global average of 10 times, according to data compiled by Bloomberg.
“Valuations are at historic lows,” says Fadi Al Said, senior investment manager at ING Investment Management in Dubai. “And the businesses are actually doing well.”
Emerging-markets equity strategists have bullish outlooks for 2012. Geoffrey Dennis, head of emerging-markets strategy at Citigroup Inc. in New York, predicts that the MSCI index will jump 32 percent by year-end, driven by looser monetary policy in China.
In mid-January, the MSCI benchmark for $6.7 trillion of equities in developing nations was 30 percent cheaper than its historical average after dropping 20 percent last year on concern that Europe’s debt crisis would curb global growth.
“It’s just a matter of time before investors come back,” van Agtmael says. “People will start to smell opportunity instead of risk.”