Emerging markets re-emerging

Capital International emerging markets equity portfolio manager Shaw Wagener told a Guardian Trust Funds Management organised roadshow in Auckland last week that emerging market economies have continued to get stronger.

He says their economic growth has consistently outpaced GDP growth in developed countries over the past 10 years.

"Average growth (in emerging markets) has been consistently superior to that of the developing world," he says.

One of the other trends is that a more attractive universe of stocks has emerged. No longer is the Emerging Markets Free Index dominated by Government controlled companies. Rather world class companies such as Samsung Electronics and Taiwan Semiconductor dominate the index.

Wagener says the other key feature of the emerging markets sector is that valuations are appealing, and relative price/cash earnings have declined for the market as a whole.

He says $1 of equity in an emerging markets company is 40% more profitable than it is in a developed market company.

While there has been a wide gap between emerging market company valuations and those of MSCI companies since late 2000 Wagener expects it to close up.

He bases this assumption on the huge amount of liquidity being pumped into the US economy by the Federal Reserve's aggressive drops in short term interest rates.

"More liquidity has been the catalyst for emerging markets outperformance (in the past)," he says.

Wagener says that at the end of the day valuation does matter. When investors realise that emerging markets are so cheap the valuation gap will close up.

The biggest countries in the emerging markets index are; Korea, Taiwan, Mexico, South Africa and Brazil.

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