Cash Better Than Cheap Emerging-Market Stocks: JPMorgan
U.S. dollars are a more attractive investment than developing-nation stocks trading at the lowest valuations since 2008 as Europe struggles to solve its debt crisis and China’s economy slows, said Adrian Mowat, JPMorgan Chase & Co.’s chief Asia and emerging-market strategist.
The MSCI Emerging Markets Index has tumbled as much as 31 percent from this year’s high, sending its price-to-earnings ratio to 9.4 on Oct. 5, the lowest level since December 2008, three months after Lehman Brothers Holdings Inc. collapsed. The gauge yields 3.2 percent in dividends, compared with 0.04 percent for the biggest money-market mutual funds, according to data compiled by Bloomberg and Crane Data LLC.
Low valuations aren’t enough to spur a rally, Mowat said in an interview today. Shares may keep falling because European leaders haven’t agreed on a “serious” plan to recapitalize banks and China’s inflation is still too high for the central bank to ease monetary policy, he said. The MSCI index sank 54 percent in 2008 as the Dollar Index rose 6 percent.
“The lesson from the Lehman debacle was that U.S. cash was really the only safe asset,” Mowat, who leads JPMorgan’s emerging-market strategy team from Hong Kong, said in a phone interview. “Unfortunately Europe has to get a lot worse before it’s going to get better.”
Emerging-market equity funds have posted 10 straight weeks of outflows, with investors withdrawing $3.3 billion in the seven days ended Oct. 5, according to data compiled by Cambridge, Massachusetts-based research firm EPFR Global. China funds had $167 million of outflows during the week as the Hang Seng China Enterprises Index sank to the lowest level since April 2009.
“We’re still in a world where a significant amount of international speculative risk flow comes out of the U.S.,” said Mowat. “You tend to repatriate capital so it’s closer to where your liabilities are when there’s a big risk event.”
Mowat’s outlook contrasts with a forecast for “big gains” in developing-nation stocks during the next 12 months by Geoffrey Dennis, the head of emerging-market strategy at Citigroup Inc. in New York. Dennis wrote in a report dated yesterday that low valuations make a rally likely and that domestic demand in emerging markets including China will shield the economies from a global slowdown.
The MSCI emerging gauge has climbed 6.1 percent in the past three days, including a 2.1 percent gain to 882.41 as of 1:09 p.m. in London. The Dollar Index, which tracks the U.S. currency against those of six trading partners, slipped 0.2 percent today, paring its gain since the end of August to 5.9 percent.
For emerging-market shares, “I see an environment of these rather short, sharp rallies that then fade because people come back to realizing that this European situation is more serious,” said Mowat. “Stocks can easily go through previous valuation lows.”
European banks’ capital will be a subject for discussion at the Oct. 17-18 summit of European Union leaders, German Chancellor Angela Merkel said in Berlin today. Lenders in the region may need as much as 200 billion euros ($269 billion) of additional capital, according to the International Monetary Fund’s European head Antonio Borges. The Bloomberg Europe Banks and Financial Services Index has dropped 30 percent this year as investors became concerned that financial firms will have to write down their holdings of Greek, Italian, Spanish and Portuguese government bonds.
“If I could just completely ignore Europe, we would have a different recommendation,” Mowat said. “But unfortunately our perspective at JPMorgan is that you need a very serious proposal to recapitalize the European banking system, and that is not really being discussed at a euro-wide basis.”
While Mowat began 2011 forecasting the MSCI index would rise to 1,500, he cut his year-end estimate to 1,300 in February. Mowat told Bloomberg Television on April 18 that the gauge may fall about 20 percent. The index peaked two weeks later and entered a bear market on Sept. 13.
Investors should hold “underweight” positions in Chinese stocks, Mowat wrote in a report today. The biggest emerging economy will slow as an inflation rate 50 percent higher than the central bank’s stated target keeps it from easing policy, while a worsening real-estate market, slower corporate spending and rising nonperforming loans weigh on demand, Mowat said.
Signs that leaders in Europe and the U.S. are finding ways to end the debt crisis and boost growth, along with easing inflation in China, would create a more bullish outlook for emerging-market stocks, Mowat said. Shares began surging from their 2008 lows after the Group of 20 nations and China announced stimulus plans, the strategist said.
“Look for the policy response,” Mowat said. “That’s when the market changes direction.”
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