Stocks in emerging markets are still cheaper...

Nov 25, 2010

In this issue:
» How Europe should resolve its crisis
» Strict labour laws are a hindrance to growth
» Fed downgrades US growth forecast
» More drugs likely to be under price control
» ...and more!!

------------------------------ Listen Carefully! ------------------------------
"My goal is to make you good money over the long term"
That's Asad Dossani, the author of The Lucrative Derivative Report, a currency and commodity recommendation service. And by the way, he is already off to a flying start... with returns ranging from 4.9% to 23.8%... and that too all in the matter of days.
For full details about The Lucrative Derivative Report, and the track record so far, click here...

The name Antoine van Agtmael may not immediately ring a bell but he was credited with coining the term 'emerging markets' in 1981. And the chairman and chief investment officer at Emerging Markets Management LLC has more views to offer when it comes to emerging markets.

Agtmael opines that stock valuations of emerging markets are a long way from bubble levels and the shares in those regions will outperform developed markets amid faster economic growth. Interestingly, Agtmael had warned of bubbles in emerging markets in 2007. This is when stockmarkets had peaked just before the crash happened. But he believes that this time the same worries do not persist. Simply because valuations are below long-term averages and cheaper than in developed nations. He is also confident that emerging economies will expand about three times faster than advanced countries in the next few years.

We do not doubt the growth prospects of emerging markets including India. But we are skeptical about the stockmarket valuations in these regions. True, the debt contagion in Europe and depressed conditions in the US mean that money will keep flowing into equities of emerging countries. But investing in equities on that rationale alone is tantamount to folly. In India itself, stock prices of many companies appear to be fairly valued if not overly expensive. And thus, investors would do well to not get carried away by all this euphoria and focus instead on good quality stocks only when they are available at reasonable prices.

 Chart of the day
The global financial crisis had an adverse impact on hotels in cities across the world as travel considerably reduced. As a result, both occupancies and room rates took a hit. But Asia atleast has recovered much faster than the developed world. And this has been evident in the strong rise in hotel room rates as well. That said, as today's chart of the day shows, Mumbai has seen a dip in average room rates in the Jan-Sep 2010 period. However, the occupancy rates have risen and have thus contributed to the overall growth in revenues of hotels.

Data Source: The Economist

Yesterday's Financial Times talks of a very interesting term with respect to the Eurozone. The term is 'Permanent Crisis Resolution Mechanism'. The reason it is interesting is because it can have two meanings. Resolution of a permanent crisis or the permanent resolution of the current crisis. Indeed, it is the latter that the Europe's authorities are currently grappling with. Already, investors have taken countries like Greece and Ireland to the cleaners. And it won't be long before Spain, Portugal and even France get sucked in. It is becoming quite clear that something radical will have to be done. But no one is sure what that radical measure is likely to be.

May be, the European Central Bank does the US Fed and starts buying up Government bonds of troubled countries by the trillions. Europe's own quantitative easing, if you will. However, it will be next to impossible to get Germany on board as the country is petrified of inflation. And even more radical step could be to forge some kind of fiscal union. In other words, no European Government be given the right to issue its own bond. That authority should lie with a common Eurozone body. However, it looks unlikely that the Governments will be able to stomach such a step. Similar other measures are being mooted all around. But no solution seems to be in sight. It appears that confusion will rule the roost for some time to come with speculators having a field day.

High unemployment levels may have unnerved some of the richest economies globally. But the strict labour laws in India present us with issues of a different kind. And these have assumed such proportions that even the Prime Minister reckons them amongst the biggest hurdles to India's growth.

Indian labour laws have strict constraints on firing workers. Whether it may be for lack of performance or for rationalizing manpower. The same is intended to offer job security to employees. On the contrary, they have made employers reluctant to hire workers in labour intensive units. Instead they invested in capital intensive manufacturing units where technology could substitute labour. The result has been vast growth in employment in the unorganized sector as against the organized one. A recent survey showed employment in the unorganized sector being 15 times that in the organized one. Even government owned entities that opted to shed excess manpower did so by hiring contractual workers. Agreed, these did add up to employment numbers. However, in most cases the contracts deprived the workers of benefits that the permanent employees were entitled to. A labour friendly change to the law would be welcome.

The central banking authority of US has embarked upon the ambitious QE2 with the hope that it would help revive its economy. However, the Federal Reserve feels that the impact of this would take time to be realized. The Fed has recently downgraded its forecast for US growth to 2.4 to 2.5% this year from their earlier estimate of 3 to 3.5%. They have even revised growth forecasts for next year from 3.5-4.2% down to 3-3.6%. It went on to state that it expects the unemployment rates to be around 9.5-9.7% by the end of this year. This is expected to decline only marginally in 2011 and come to more rational levels of 7.4% only by 2013. As such from the Fed's comments it appears that US economy will take time to revive. We wonder whether we should expect more quantitative easing from them in the meantime. The existing round has already sparked fears of high inflation rates going forward. What would happen to inflation if more easing were announced? It remains to be seen.

After the global financial meltdown caused India's exports to shrink sharply to traditional markets in the EU and the US, the government decided to promote less tapped markets. And gave incentives to exporters to explore 39 new markets. Thus, exports to Latin America doubled in the April-July 2010 period to US$ 3.2 bn followed closely by Africa. In contrast, exports to Europe, one of the biggest markets for India's goods, were up only about 15% in this period.

The thrust towards non-traditional markets such as Latin America and Africa appears to have helped India's exports. This bodes well for the economy as it battles with the rising current account deficit, which has largely been due to imports exceeding exports. In first seven months of the current fiscal, this difference was US$ 72.8 bn. Overall, exports have grown 26.8% YoY to US$ 121.4 bn in the April-October 2010 period. The high growth is expected to moderate in the coming months because of the waning of the base effect. However, the government expects the target of US$ 200 bn to be reached comfortably.

For Indian pharma companies, contending with regulations in either India or abroad is part of how the pharma model works. Which is why many domestic pharma companies are de-risking revenues by being present across geographies. The domestic pharma market offers scope for growth largely driven by volumes and new product launches. But pricing is a different issue altogether. In a latest such development, the health ministry plans to enlarge the scope and size of the National List of Essential Medicines (NLEM). This could bring more than half the country's Rs 650 bn medicine market under price control.

At present, the government currently controls the prices of about 20% of the domestic drug market. But the latest proposal includes bringing all strengths of shortlisted drugs under essential medicines. And so the scope of price control could be higher. It remains to be seen whether this proposal gets converted into action. In 2006, the price control authority had proposed bringing 354 drugs on the NLEM under price control. This has yet to see the light of day. Simply because it was stiffly opposed by the Indian pharmaceutical industry.

At the time of writing, the Indian stock market were trading flat after starting trading well above the dotted line for the first half of the day. The pessimism was led by stocks from the realty, metal and capital good spaces. On the other hand, healthcare and IT stocks were in favour. As for rest of Asia, markets ended on a positive note with China, Hong Kong and Japan all up by about 0.5% to 1% today.

 Today's investing mantra
"Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics, the more uncertain and speculative are the conclusions we draw there from." - Benjamin Graham

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Stocks in emerging markets are still cheaper...". Click here!

3 Responses to "Stocks in emerging markets are still cheaper..."


Nov 25, 2010

Great reading, most informative. Since i have started reading this has become an compulsive activity everyday.Thank you.



Nov 25, 2010

I would prefer a called Wages Act, every employee/ even house cleaning maid hired should be paid AT THE MONTH END, WEEK END, WHAT EVER AGREED.
If failed, immediately the owner should be put behind the bars and then inquiry should be started. This will reduce the agents, body shopping mafias. This non payment is causing the big problem.


J Thomas

Nov 25, 2010

'Permanent Crisis Resolution Mechanism' means a Permanent Mechanism for Crisis Resolution. In India the equivalent term is 'Standing Committee."

Equitymaster requests your view! Post a comment on "Stocks in emerging markets are still cheaper...". Click here!