Are Emerging-Markets Stocks Cheap?

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Due to sluggish economic growth in the developed world and strong growth in emerging countries, investors are betting that emerging market equities will yield better returns. According to a story in the Journal:

“In a recent report, Standard & Poor’s said that almost $50 billion flowed into emerging-markets equity funds this year through September, while $78 billion flowed out of developed-market funds, based on data from fund-flow tracker EPFR Global. In the week ended Oct. 6, emerging-markets equity funds attracted $6 billion, the largest weekly inflow in about three years.”

Based on the trailing P/E ratio emerging market stocks are no longer cheap compared to U.S.  stocks.

Emerging-Developed-markets-PE-Correlation

Source: The Wall Street Journal

“Vanguard analysts sometimes look at the price/earnings ratio for the MSCI Emerging Markets Index on a trailing basis. It suggests that valuations for U.S. and emerging-markets stocks have moved much more closely into alignment recently, compared with much lower relative valuations for emerging-markets stocks early in the decade.”

As ETFs have become very popular, emerging market ETFs are attracting a large portion of the funds that investors are pouring into emerging stocks. Hence the asset base of two of the biggest emerging market ETFs continues to grow. In October alone, the Vanguard MSCI Emerging Markets ETF (VWO) attracted $3.22 billion in new assets. The iShares MSCI Emerging Markets Index Fund (EEM) collected $1.57 billion. The iShares ETF retains its position as the largest emerging-market fund with total assets of $48.0 billion as of November 1, 2010.

Ten Highly Liquid British Stocks

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In order to identify some of the highly liquid British stocks I used the S&P; United Kingdom Index. This index is a subset of the S&P; Europe 350 and tracks the performance of highly-liquid equities in different sectors.

The median market cap of constituents in the index is about 4.81 £ Billion. The top 10 holdings account for about half of the market cap of the index.

The Top 10 highly-liquid constituents are noted below with their current dividend yields:

1.HSBC Holdings Plc (HBC)
Current Dividend Yield: 3.07%

2.Vodafone Group (VOD)
Current Dividend Yield: 6.33%

3.BP Plc (BP)
Current Dividend Yield: N/A

4.Royal Dutch Shell PLC (RDS.A)
Current Dividend Yield: 5.17%

5.GlaxoSmithKline (GSK)
Current Dividend Yield: 5.20%

6.Rio Tinto Plc (RIO)
Current Dividend Yield: 1.33%

7.Royal Dutch Shell PLC (RDS.A)
Current Dividend Yield: 5.22%

8.BHP Billiton Plc (BBL)
Current Dividend Yield: 2.54%

9.British American Tobacco Plc (BTI)
Current Dividend Yield: 2.75%

10.AstraZeneca Plc (AZN)
Current Dividend Yield: 2.77%

Ten Reasons Why India’s Stock Market is a Bubble

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India’s Sensex closed at 20,032 on Friday.This is not far from the all-time high of 20.873 reached in January 2008. During the credit crisis, the index reached a low of 8.160. In just over 18 months the index has rebounded sharply gaining over 150%. This dramatic rise is mostly based on the assumption that the economy will grow at over 8% consistently. However there are many external and internal factors that may put this growth rate into jeopardy. As the hot money continues to flow into the Indian markets, I believe investors need to cautious as the risks for downward movement are higher than the rewards for further rise from current levels.

Sensex Performance – 5 Years:

bse-sensex-5-years.png

The following are some of the reasons investors may want to consider before jumping into the Indian markets:

1. Indian equities have become very expensive compared to other emerging markets. For example, the PE of the Nifty index is about 25. India trades at a PE of 23.9 while Brazil and China have P/Es of 12.5 and 14.2 respectively based on Financial Times market data.

2. Foreign investors are pouring money into the markets. They pulled out $14.84 billion during 2008 which led to the crash of the Sensex. But thru September of this year they have plowed back over $15.62B in the markets. Foreign portfolio investment which is highly short-term focused reached over $32.0B in 2009-10 period .

3. Relatively speaking only a few shares of the major companies that are actively are available for trading. Hence large amount of capital chasing a few free-float shares in select companies leads to huge rise in stock prices.

4. Inflation runs at double digits and may rise further if policy makers do not increase interest rates.Inflation remains stubbornly high primarily due to food prices.

5. Some of global commodity prices have risen over 10% this year. This will put pressure on manufacturers to raise prices as their input costs rise.Further increase in prices will lead to higher inflation.

6. Rupee, the Indian currency has appreciated significantly this year against the dollar hurting exports of goods such as textiles, machinery, etc.

7. Unlike Brazil and other countries policy makers have not implemented regulations such as doubling of taxes on foreign capital inflows to slow the flow of capital.Instead regulators and politicians are encouraging the boom of all asset prices continuing the India growth story.

8. While the savings rate in India is one of the highest in the world, domestic investors’ investment in the equity market is very low. The majority of the savings lie in banks earning lower returns adjusted for inflation. This shows the lack of conviction in the markets among the majority of the local population.

9. The corporate debt market is almost non-existent in India. Hence companies have to raise funds either thru the equity markets or banks. The lack of bond markets causes distortion in the channeling of funds from investors to companies.

10. India is a debtor country and the external debt continue to rise due to lavish subsidies offered by politicians.As of October this year, external debt stood at $273.1 billion.

Overall the run-up in equity prices is not justified based on fundamentals and earnings growth. Some experts are predicting a rise of another 10% in the markets due to the upcoming Diwali – the “Festival of Lights” season, liquidity and other factors. However it still does that change the fact that Indian stocks are expensive. “Irrational exuberance” is rampant in the markets which will lead to a painful correction.

Top 25 Banks in North America and Western Europe

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The Top 25 Banks in North America and Western Europe based on Tier 1 Capital in 2009 are listed below. This ranking is part of the annual World’s Top 1000 Banks published by the The Banker magazine of the UK.

a) Top Banks in North America

Top-25-North-American-Banks

b) Top Banks in Western Europe

Top-25-Western-European-Banks

Source: The Banker

Some observations:

1. The four U.S. superbanks – Banks of America(BAC), Wells Fargo(WFC), Citigroup (C) and JPMorgan Chase(JPM) – take the top four places in this list.They are also in the top 10 world rankings.

2. Among the large Canadian banks, Scotiabank (BNS) and Royal Bank (RY) are within the top 10 ranks.

3. Royal Bank of Scotland (RBS) tops the Western European banks ranking.RBS is majority owned by the British state.

4. Despite fears of failures, major traditional banking giants of Europe such as ING Grope (ING) of Holland, Societe of Generale (SCGLY) of France, Commerzbank(CRZBY) of Germany, etc.  survived the financial crisis and are now well capitalized.

Top 25 Banks in Latin America

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The Top 25 Banks in Latin America based on Tier 1 Capital in 2009 are listed below. This ranking is part of the annual World’s Top 1000 Banks published by the The Banker magazine.

Top-25-Latin-Banks

Source: The Banker

Brazilian banking giant Itau Unibanco(ITUB) leads the Top 25 Latin American rankings. It is also the 33rd on the global list based on Tier 1 capital. Itau is followed by its competitor Banco Bradesco(BBD).