June 12 (Bloomberg) -- Emerging-market stocks have trailed U.S. shares so badly during the past three years that they are worth buying in anticipation of a rebound, according to Ryan Larson, an analyst at Research Affiliates LLC.
The CHART OF THE DAY compares total returns on the MSCI Emerging Markets Index and the Standard & Poor’s 500 Index for the three-year period ended June 10. They reflect dividends as well as price changes.
MSCI’s gauge of stocks in 23 developing countries returned 0.9 percent, trailing the S&P 500 by 63 percentage points. Gaps this wide were last seen in the years following Asia’s currency crisis in 1997 and Russia’s debt default in 1998, Larson wrote in a report two days ago.
“Emerging-market stocks may be poised for meaningful appreciation,” the Newport Beach, California-based analyst wrote. He cited the potential for higher profit at emerging companies and lower valuations relative to U.S. shares.
Earnings per share in developing countries are 10 percent lower than history would suggest after adjusting for inflation, the report said. Profit in the U.S., by contrast, is 50 percent higher than indicated by companies’ past performance.
To determine valuation, Larson compared the indexes with companies’ average profit for the past 10 years, an indicator developed by Yale University Professor Robert J. Shiller. He found emerging-market shares were valued at 14 times earnings, well below the S&P 500’s ratio of 25 times.
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