April 25, 2006
IS THE CLOCK TICKING FOR EMERGING MARKETS STOCKS?
Emerging Markets stocks are comfortably in first place in the performance race among asset classes so far this year through April 24. No, let's rephrase that: Emerging markets are flying. The MSCI Emerging Markets Index, based in dollars, has climbed a stellar 19% year to date. Even small-cap stocks, another hot performer with a 14% rise so far, are having a hard time keeping up this year through last night's close.
Meanwhile, bonds of various types dominate the opposite end of the return spectrum. Among the dozen investment types we track here, inflation-protected Treasuries (measured by the Vanguard Inflation-Protected Securities Fund) have lost 2.3% year to date. A broader measure of U.S. bonds, via the Lehman Aggregate Bond Index, is off fractionally. This year is proving to be relatively tough sailing even for U.S. high yield bonds, which have climbed 3.3%, according to the Merrill Lynch High Yield Master II Index.
Indices/Funds: MSCI EM ($), Russell 2000, MSCI EAFE ($), MSCI REIT, S&P 500, DJ-AIG Commodity, ML HY Master II, 3-mo T-bill, Pimco EM Bond Fund ($), Lehman Bros. Aggregate, Pimco Foreign Bond ($), Vanguard Infl Prot Sec
Stocks, in other words, are enjoying a bull market this year. The riskier, the bigger the payoff in the land of equities. Expecting the party to end has been a losing proposition so far in 2006. Contrarians might expect that the good times will soon end, but looking for warning signs amid valuation ratios offers a mixed bag.
According to S&P/Citigroup Global Indices, emerging markets overall look only slightly pricey to world equities based on dividend yields and the price-to-sales ratio for data as of March 31. In contrast, emerging markets are a modest bargain if you compare them to the world stocks by way of the price-to-book, price-to-cashflow, or trailing 12-month price-to-earnings ratios.
There are other threats that could derail the party in emerging markets, but the obvious ones that can be sliced and diced in spreadsheets are for the moment fairly benign. That may be false comfort, but in the meantime upward momentum is still the path of least resistance. But the hour is late. Caveat emptor!
© 2006 by James Picerno. All rights reserved.
Posted by jp at April 25, 2006 10:11 AM
The problem with comparing emerging markets to broad market averages is one of reference dependence! Sure, they may look cheaper RELATIVE to say the S&P500, but then the S&P500 is at an expensive level. Also, what people always forget is that in the short to intermediate term, there is something to be said for liquidity. Much of the retail mutual fund money has flowed to emerging markets over the past 16 months, and they will get a rude education on how these markets can behave when liquidity dries up. Being relatively cheap does not mean that a market cannot fall farther - especially if it is relatively illiquid! I agree that the momentum could continue for who knows how long, but find a chair when the music stop can be rather tough....
Posted by: James at April 25, 2006 10:46 AM